Sembcorp Industries 4Q19
Sembcorp Industries announced its 4Q19 results before the market opens on 21 February.
The losses at S$15m for 4Q19 came in smaller than my expectations, even after accounting for its share of Sembcorp Marine’s substantial losses.
These were due to two main reasons.
One, Sembcorp Industries’ Urban Development division performed extremely well this quarter with the sale of a China development that boosted divisional net profits to S$87m in 4Q19 vs. S$33m in 4Q18. Such strength is unlikely to be recurring, in my view.
Two, its Energy division, net of all the impairments previously announced, put up a credible performance, with total net losses of “only” -S$63m in the current quarter. This was due to India’s strong performance which was two-fold.
India’s profit of S$46 in 4Q19 vs. S$-6m in 4Q18 was likely due to better core operating performance from its renewable energy entity SGI, as well as one-off benefit from insurance and vendor settlements.
Looking at the Profit from Operations (PFO) for its SEIL Thermal Project Plant (P1) for the full-year 2019, there was a substantial YoY increase in PFO of S$41m. Management disclosed that the net impact was S$48m, which implied that its core operating performance for 2019 was lower (ex one-offs) vs. 2018.
Without this positive net impact of S$48m on its operating profits, India’s net profit in this current quarter would have been substantially lower.
A second positive surprise was the increase in final DPS which was S1 cents higher than 4Q18, bringing total full-year 2019 DPS to S5 cents which at the current price of c.S$2, implies a yield of 2.5%. Not fantastic, but it is something that the market would be appreciative of and wishes to see in a utility company.
However, the sustainability of such dividend payments, taking into account its balance sheet strength and cash flow generation ability remains in doubt. The company is in a slight positive free cash flow position for 2019 and still carries a huge net debt burden of c.S$9bn on its balance sheet, translating to a net debt to equity ratio of 1.1x.
Overall, Sembcorp Industries 4Q19 performance was likely still on the weaker end, considering various one-offs that boosted its performance in the current quarter might not be recurring in 2020.
However, its share price has declined substantially to c.S$2 and at this current level, my sense is that its downside is limited with a potential strong catalyst from the possible divestment of its 61% Sembcorp Marine stake to Temasek.
Sheng Siong 4Q19
Sheng Siong 4Q19 performance was weaker than my expectations. Despite revenue increasing a strong 12% YoY in 4Q19, net profit declined by 0.4%.
Strong revenue growth was attributable to new store openings, up 8.6% YoY in 4Q19 while same-store sales growth (SSSG) improved by 1.8% YoY.
Gross margins continued to demonstrate an improvement in the current quarter, albeit a marginal 0.1ppt to 27.2% vs. 27.1% in 4Q18.
Administrative expenses increased by 11.3% or S$4.4m in 4Q19 vs. 4Q18. There was better overall cost control, considering that FY2019 increased in administrative expenses were 12.1% higher vs. FY2018.
The major blip in the current quarter performance was likely its distribution expenses which increased by 100% YoY to S$2.66m. Management attributed the higher expenses to higher staff costs brought about by a higher volume of business.
Lastly, the effective tax rate of 18.9% in 4Q19 was also substantially higher than the previous quarter tax rates. That partially contributed to the decline in net profit for 4Q19 vs. 4Q18.
Despite the marginally weaker position in this quarter, Sheng Siong remains one of the more defensive names to own in the current climate. The COVID-19 virus could potentially boost Sheng Siong’s business (while most other struggles) if its supply chain is not negatively impacted.
That has been partly reflected in its share price which was up 8% since the start of February. The company increased its final DPS marginally from S1.75 cents to S1.8 cents. This brought its FY2019 DPS to S3.55 cents, implying a yield of 2.7% at the current price of S$1.31.
While the market might be slightly disappointed with the weaker 4Q19 earnings vs. 4Q18, the longer-term outlook of the company remains relatively resilient and I don’t expect its share price to significantly correct due to this set of results, which in all honesty, wasn’t that bad, in my view (Strong sales growth with GPM continues to trend higher).
However, Sheng Siong now spots a hefty market cap of S$2bn. Based on current earnings of c.S$76m, that is a substantial trailing PER multiple of 26x. If the company cannot maintain its earnings growth trajectory, which is currently in the high single-digit arena, the market will re-rate the company lower and that to me warrant caution.
A potential long-term catalyst would be the success of its China venture. Shorter-term, the company could look to benefit from some of the goodies dished out by the Singapore government in the latest Budget 2020 which should help to alleviate wage pressure to a certain degree.
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Disclosure: The accuracy of the material found in this article cannot be guaranteed. Past performance is not an assurance of future results. This article is not to be construed as a recommendation to Buy or Sell any shares or derivative products and is solely for reference only.
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