To The Moon

$SEMBCORP INDUSTRIES LTD(U96.SI)$

1H22 earnings blew past estimates. Net profit of S$490m made up 93% of our previous 5% above consensus full year forecast. The impressive performance was driven by its Conventional Energy segment, especially in Singapore and India that saw a spike in tariffs and spreads. This was further boosted by gains from gas hedges (S$68m) and other income (S$24m) totalling S$92m that are not recurring. The unwinding of gas hedges occurred due to the cancellation of the cargo expected in 1H22.

Other income included settlement with customers on late payment of S$15m (1H2021: S$15m) and with

O&M contractors of S$8m in India and cancellation fee of S$12m received from a supplier in Singapore.

Earnings revisions. We are raising our FY22/23F net profit by 46/18% after factoring in the stronger 1H performance, earnings improvement of India Plant 2 and higher contribution of recent acquisitions of renewable assets in China.

I expect profit to normalize in 2H22, though still stronger y-o-y taking into consideration the potential slowdown in economic activities but improved fundamentals of the power markets in Singapore and India.

Potential Special Dividend in 2H; Declared interim dividend of 4 Scts, double that of 1H21’s 2 Scts, translating to a dividend yield of ~1.3%. i revised up my projection for final dividend to 4 Scts and assume a special dividend of 2 Scts, bringing full year DPS to 10 Scts or 3.3% yield. This implies a 23% payout ratio, at the higher end of the 19-24% range in the past 3-years.

Management shared during the briefing that SCI adopts a dividend principal that rewards shareholders with steady returns while balancing with capital requirements for capex and growth. A special dividend in 2H could be considered on the back of strong financial performance.

Gross renewable capacity has grown to 7.1GW as of end Jun-22, from 6.1GW end last year, look set to achieve its 10GW target ahead of 2025. This Includes 1.7GW generation capacity that is currently under development.

Renewable profits surged 138% h-o-h to S$76m in 1H22 with maiden contribution from recent acquisitions in China. Acquisitions of SDIC (35% stake) and Shenzhen Huiyang New Energy (HYNE, 98% stake) were completed in Jan and Jun 2022. They contributed profit of S$23m and S$7m (excluding interest expense) respectively in 1H22. Renewable segment now accounts for 16% of group headline profit.

Myanmar – low risk of provisions/ impairments. Based on our assessment of the situation, management expects low risk of operational disruption and provisions/impairment. While the Central Bank has announced a halt on foreign loan payments, SCI continues to receive prompt payments for its power generation in Myanmar and believes it should not be impacted being an essential service. SCI’s power plant in Myanmar has a book value of c.S$100m and outstanding loan of ~S$200m.

@TigerStars

DYODD