Hot stock: Sembcorp shares down 5% after flagging S$245m impairment

SHARES in Sembcorp Industries are seeing a selloff during Friday's session after the conglomerate issued a profit guidance for its fourth quarter ended last December due to an impairment of S$245 million, which forms around 4 per cent of the company's net asset value as at Sept 30, 2019.

At 2.25pm, Sembcorp's stock was trading S$0.11 or 5.1 per cent lower at S$2.05 on a volume of 9.8 million, making it among the Straits Times Index's most active counters. 

The S$245 million impairment that the company announced on Thursday after market close comprises a S$158 million write-down of its UK Power Reserve (UKPR) assets, a S$64 million reduction in value after the divestment of its Chilean water business, and a S$23 million impairment of its China wastewater treatment assets.

Citi Research said: "We estimate SCI's (Sembcorp Industries) divestments since January 2018 to have exceeded about S$600 milion - the group will continue to exit its peripheral utilities businesses in a bid to pare down net gearing."

The write-down of the UKPR assets, which form the bulk of the impairment, was attributed to an increase in total energy capacity in the UK and the reduction in underlying demand due to energy efficiency and reduced industrial production.

As a result, Sembcorp said its energy business is expected to make a net loss for Q4, but believes it will be profitable for the full year. The energy business would have outperformed FY2018's performance if the exceptional items including the impairment are excluded.

The conglomerate did not specify if it would record a loss for Q4. 

UOB Kay Hian head of research Adrian Loh said: "Despite the large S$158 million impairment on the UK business, SCI stated categorically that UK power remains a core business for the company and that the focus on developed markets has not changed."

However, Mr Loh added that he was "somewhat perplexed that the company's commercial due diligence did not highlight the risk that the UK market may suffer from excess energy supply and lower-than-expected demand".

When Sembcorp acquired UKPR in 2018 for S$385 million, it was generating S$7 million in net profit after tax. 

DBS analyst Ho Pei Hwa noted: "While SCI is already trading at a steep discount to book at 0.6 times against 5-6 per cent return on equity and 2 per cent yield, recent incidents have dampened confidence on acquisition growth and its earnings recovery outlook.

While current share price appears to have the impairment priced in, OCBC Investment Research noted that "there is probably a greater impact on investor sentiment with regard to the group's decision-making process related to acquisitions."

With price correction expected due to the magnitude of the impairment, Citi Research acknowledged Sembcorp's other growth initiatives remain intact including its recent greenfield ventures in developing markets like Myanmar and Bangladesh.

Going forward, Ms Ho believes the recovery of Sembcorp's India operations, its marine business as well as execution in emerging markets are key catalysts to restore investor confidence.

For Sembcorp, which will be reporting its Q4 and full year results on Feb 21 before market open, UOB Kay Hian's Mr Loh has lowered his 2019 net profit forecast by 70 per cent to S$106 million to take into account the impairments.

The impairments are unlikely to affect dividend payouts as they are likely to based on core, underlying earnings which excludes impairments.

Following the announcement, DBS Group Research downgraded Sembcorp to "hold" with a target price of S$2.20. Citi Research maintained its "buy" call and price target of S$2.80. OCBC Investment Research maintained its "hold" recommedation but lowered its fair value for the stock to S$2.13.

UOB Kay Hian is of the view that investors can look to enter positions on Sembcorp at S$2.05. The brokerage currently has a "hold" call with a target price of S$2.17.