STI top gainer Sembcorp faces rougher ride next year

[SINGAPORE] Equity investors have given Singapore's Sembcorp Industries a big thumbs-up this year after it shed its loss-making marine unit. But 2021 may prove to be a lot less euphoric, according to analysts.

The utilities firm is 2020's top gainer on the benchmark Straits Times Index (STI), after being the worst performer in the preceding five-year period. However, concerns over the economic recovery in some of Sembcorp's biggest markets are emerging, adding pressure to further gains.

Analysts on average predict that the stock will rise just 5.1 per cent over the next 12 months, versus an estimated 9.6 per cent gain for the benchmark STI gauge, Bloomberg surveys show.

While plans to split from unit Sembcorp Marine resulted in a flurry of rating upgrades in June, the firm expects to incur a full-year loss for 2020 amid the pandemic, which will be its first in more than two decades based on Bloomberg-compiled data.

"Power demand is critical to the business to recover and we don't expect it to increase too sharply," particularly in some of Sembcorp's biggest markets such as Singapore and India, said Terence Chua, an analyst at Phillip Securities Research.

RISK OF WRITE-DOWNS

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Sembcorp's shares are up 52 per cent this year even as the STI gauge is down 12 per cent, thanks to the demerger and a broad recent market rotation into beaten-down shares.

The stock had a torrid start to 2020 as Singapore's cyclical businesses suffered amid pandemic-induced lockdowns at home and abroad. The city-state's export-driven economy continues to be affected by movement restrictions and border closures, and its recovery still depends heavily on external factors.

Meanwhile, the virus outbreak has thrown India into an unprecedented recession and the nation faces questions over vaccine distribution and access. There are concerns about profitability of some of the projects at Sembcorp's India unit, given lower spot power prices and problems with securing long-term contracts, according to Citigroup.

"There could be a risk of write-downs in future periods," Citi analyst Kwok Wei Chang wrote in a Dec 7 note.

TOP ANALYST

However, the top analyst covering the company continues to be bullish.

Morgan Stanley's Mayank Maheshwari has a 12-month price target of S$2.60 on the stock, which implies a 49 per cent gain from current levels. He upgraded Sembcorp to overweight from underweight in June following the demerger plan.

Recently-announced impairments of S$89 million will support its return-on-equity "progression and address investor concerns over its book quality", Mr Maheshwari wrote in a note earlier this month.

Meanwhile, Sembcorp's shares have dropped more than 4 per cent so far in December. That's versus a 1.5 per cent gain in Singapore's benchmark equity gauge.

BLOOMBERG