Shares of Sembcorp Industries have traded higher despite having announced its first ever full-year net loss and largest full-year revenue decline for FY2020 ended Dec 31. The stock is up 6.6%to close at $1.77 on March 3, extending its 12-month gain to 88.9%. The counter is trading not too far from its five-year high of $1.88 achieved late last year.
Sembcorp’s positive share price performance, it seems, has continued to be driven by the company’s prospects, rather than being weighed down by the consolidation of Sembcorp Marine’s (Sembmarine) loss-making performance for much of 2020.
Sembmarine had ceased to be a subsidiary of Sembcorp only in September last year upon the completion of the distribution in specie of the latter’s shares in the former. Sembmarine has long struggled to weather the prolonged downturn in the offshore and marine sector owing to the depressed prices of crude oil.
Wong Kim Yin, who was appointed as group president and CEO of Sembcorp on July 1 last year, says the demerger has allowed Sembcorp to pursue new opportunities more freely. “I can certainly say that [we have] much more focus — that we can be and have become,” he says at the company’s FY2020 results briefing on Feb 23.
For FY2020, Sembcorp swung into a net loss of $997 million from earnings of $247 million in FY2019. The company says the loss was mainly due to a non-cash, non-recurring fair value loss of $970 million recorded.
The fair value loss arose from the completion of the distribution in specie of ordinary shares in the capital of Sembmarine in September last year and a net loss of $184 million from the marine business prior to the distribution. In addition, the company recorded exceptional items of negative $144 million.
Sembcorp’s revenue also tumbled 19% y-o-y to $5.45 billion from $6.74 billion. The decline came mainly from the company’s energy segment, which remained as the key contributor to its top line.
Despite the gloomy set of results, the company has proposed a final and total dividend of four cents a share for FY2020. In the preceding FY2019, it paid a total of five cents.
‘Brown to green’
According to Wong, Sembcorp is able to improve its capital management post-demerger. Previously, the company was extremely cautious — if not almost reluctant — to invest significantly in the areas of sustainability and renewable energy, he notes, because it had conserved cash in case it needed to recapitalise Sembmarine.
For instance, Sembcorp provided a lifeline to Sembmarine via a five-year $2 billion subordinated loan facility in 2019. About $1.5 billion of the subordinated loan was deployed to retire a majority of Sembmarine’s short-term borrowings and reprofile debt from short-term to longer term. The remaining $500 million was earmarked for working capital and general corporate purposes.
But since the demerger, Sembcorp was able to allocate its cash more efficiently. Wong points out that the company’s subsidiary — Sembcorp Energy India (SEIL) — was able to complete all its key wind energy projects in India. SEIL is the first independent power producer to deliver on its projects awarded in the first three wind tenders held by the Social Energy Corp of India (SECI). It now has operational renewable energy capacity of 1,730 MW in the South Asian country, following the full commissioning of the 300 MW SECI 3 wind project.
SEIL’s subsidiary — Sembcorp Green Infra — has clinched a new 400 MW solar power project that will be developed in Rajasthan. The project’s entire output will be sold to SECI under a 25-year power purchase agreement. It is expected to be ready for commercial operation by mid-2022. “[So], you can see how the demerger has enabled us to be more focused in the direction that we want to go,” Wong says.
More excitingly, Wong says Sembcorp will be unveiling in May details of its new strategy to push further in renewable energy. He declines to elaborate when asked whether the company may develop more solar power projects or venture into charging infrastructure for electric vehicles (EVs). But he adds that Sembcorp — as one of Singapore’s largest solar power players — will not be left without its fair share of the action.
“I’m dying to tell you about it,” says Wong. “We clearly have got strong ambitions, but I will only be able to give you a little bit more colour [for now]. We will share [later] how we intend to shift the portfolio from brown to green.”
Myanmar risk
Meanwhile, Sembcorp’s operations in Myanmar could face a potential disruption. Since the civilian government was overthrown by the Myanmar army on Feb 1, protests against the military coup have been ongoing with no signs of abating. At least 21 people have been killed as a result.
Sembcorp operates a 225 MW gas-fired power plant in Mandalay via its subsidiary Sembcorp Myingyan Power Company. The plant commenced full commercial operation in 2018.
As at Dec 31, 2020, the net book value of the facility was US$57 million ($75.8 million) and US$230 million of the project’s loan remains outstanding. The outstanding loan is backed by a corporate guarantee issued by the company’s subsidiary, Sembcorp Utilities.
Sembcorp’s subsidiary, Sembcorp Development, is also developing its first integrated urban development called the Myanmar Singapore Industrial Park (MSIP) in Yangon. Sembcorp Development was given the lease of 436 hectares of land in the Hlegu Township of Yangon Region for industrial, residential and commercial purposes. The industrial park will be developed over a period of nine years, in tandem with market demand.
Myanmar Singapore (Hlegu) Industrial Park JV Co (MSIP JVCo) will undertake the master development of the integrated urban project. MSIP JVCo was incorporated in Myanmar with a paid-up capital of US$2 million. Its shareholders comprise Sembcorp CSSD Myanmar, Pahtama Group and Myanmar Agribusiness in the proportions of 67%, 18% and 15% respectively. Sembcorp’s effective ownership in MSIP JVCo is 50.6%.
Wong says Sembcorp is monitoring the situation in Myanmar “very closely”. The safety of its staff there is the company’s top priority, he stresses. He notes that the company is communiating daily with its 70 staff in Myingjyan — which is a two-hour drive from Mandalay — and 20 staff in Yangon.
With their safety assured, Wong adds Sembcorp will continue to operate the power plant because its utility services will ensure the “well-being” of the local community. “That is our other priority,” he says. “So far, we have been able to keep it operating.”
As for MSIP, Wong says there is no potential disruption there as the site has no “activity” currently. The company has yet to start developing the site, he explains, adding that it is “too early” to say when Sembcorp will commence construction of the site. He notes that many of the upcoming customers of MSIP, who include Japanese, South Korean and Taiwanese companies, are adopting a wait-and-see stance. “We hope that the situation will stabilise soon so that we can make [decisions],” he says.
Analysts mostly positive
Most analysts, who track Sembcorp, have continued to be optimistic on the company’s prospects. This is due mainly to the company’s increasing focus on sustainability and renewable energy businesses.
CGS-CIMB Research has maintained its “add” rating for the stock with a higher target price of $1.97 from $1.95 previously. The brokerage notes that a “key catalyst” will come from the company’s aim to rebalance the current renewable/thermal mix of 40/60 profit contribution in the medium term. It believes that Sembcorp’s rate of impairment should narrow ahead as the company would have made most of the necessary write-downs already.
“Any future impairment would likely be associated with the divestments of non-core businesses. [Sembcorp’s] power plants in India are relatively new and management deems that no provision is required for now,” CGSCIMB head of research Lim Siew Khee writes in a note dated Feb 24.
DBS Group Research, too, has a “buy” rating for Sembcorp. The brokerage has reinstated coverage on the company with a higher target price of $1.85 from $1.70 previously. It points out that Sembcorp may have further upside from post-Covid-19 demand recovery, removal of equity raising overhang and growing demand for renewable energy.
“We remain positive on Sembcorp’s longerterm prospects and see renewable energy as a key growth engine to drive a valuation re-rating post demerger of Sembcorp Marine,” DBS analyst Ho Pei Hwa writes in a Feb 24 report.
However, Phillip Securities has downgraded the stock to “accumulate” rating from “buy”, albeit with a higher target price of $1.77 from $1.75 previously. The downgrade, the brokerage says, was mainly because most of the positive developments at Sembcorp have been priced in already. It notes that the recent share-price rally has raised Sembcorp’s book value to 0.6 times its FY2021 earnings forecast.
“This reflects its improving outlook and stronger operating metrics expected for FY2021,” Phillip senior research analyst Terence Chua writes in a Feb 25 note.
