• S$245m of impairments
• Mainly due to UKPR which was acquired in 2018
• 4% of NAV but there will be questions on decision making process related to acquisitions

Price Action Since Last Report

When we issued our last report on Sembcorp Industries (SCI) in mid November last year, the share price was S$2.29 and we had a HOLD rating on the stock. Since mid Jan this year, the stock price has corrected by 7% from S$2.32 in mid Jan till S$2.16 as of 6 February close, along with the broader market due to poorer sentiment due to the Wuhan coronavirus.

Expect S$245m Impairments in 4Q19 Results

Last evening, SCI announced that there will be material impairments amounting to S$245m in its 4Q19 financial statements, and as a result the Energy business is expected to make a net loss in 4Q19. However, for FY19, the Energy business will continue to deliver positive net profit. Excluding exceptional items, the FY19 underlying net profit of the Energy business is expected to be better than FY18. These exceptional items total a negative S$179m, comprising impairments of S$245m, a net S$6m mainly for provisions, offset by S$86m net gains from the divestment of businesses and assets.

Bulk of it due to UKPR

The S$245m impairment comprises S$158m impairment of UK Power Reserve (UKPR) assets, S$64m from the divestment of its water business in Chile, and S$23m impairment in China for wastewater treatment assets. Focus will likely be on UKPR, which was just acquired by SCI for about S$385m in 2018. Reasons given for the UKPR impairment were an increase in energy capacity and reduction in underlying demand due to energy efficiency and reduced industrial production. Grid volatility has also been moderated by mild and windy winters and improved forecasting by the National Grid Electricity System Operator, resulting in flexible energy generation operators such as UKPR been called on less frequently to balance the system.

About 4% of NAV; but there will be questions on decision making process with regards to acquisitions

Putting things in perspective, the S$245m impairment is about 4% of the group’s net asset value as at 3Q19. However, there is probably a greater impact on investor sentiment with regards to the group’s decision-making process related to acquisitions. We adjust our estimates and derive a lower fair value of S$2.13 on the stock.
 

Source: OCBC Research - 7 Feb 2020