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Sat, Dec 19, 2020 – 9:50 AM
The utility is the top 2020 winner on the benchmark Straits Times Index (STI), after having the worst performance in the previous five years. However, concerns are emerging about the economic recovery in some of Sembcorp’s larger markets, adding pressure to higher earnings.
On average, analysts predict the stock will rise just 5.1 percent over the next 12 months, versus an estimated gain of 9.6 percent for the benchmark STI, Bloomberg surveys show.
While plans to divest from the Sembcorp Marine unit resulted in a series of rating upgrades in June, the company expects to incur a full-year loss by 2020 amid the pandemic, which will be the first in more than two. decades according to data compiled by Bloomberg.
“Demand for energy is critical for the business to recover and we do not expect it to increase too much,” particularly in some of Sembcorp’s larger markets such as Singapore and India, said Terence Chua, an analyst at Phillip Securities Research.
WRITING RISK
Sembcorp shares are up 52 percent this year, even as the STI indicator is down 12 percent, thanks to the spin-off and a recent extensive market turnover in expired stocks.
The action got off to a torrid start in 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 is still largely dependent on external factors.
Meanwhile, the virus outbreak has pushed India into an unprecedented recession and the nation faces questions about the distribution and access to vaccines. There are concerns about the profitability of some of the projects at Sembcorp’s India unit, given lower spot energy prices and problems obtaining long-term contracts, according to Citigroup.
“There could be risk of write-offs in future periods,” Citi analyst Kwok Wei Chang wrote in a note on Dec. 7.
BEST ANALYST
However, the chief analyst covering the company remains optimistic.
Morgan Stanley’s Mayank Maheshwari has a 12-month target price of S $ 2.60 on the stock, a 49 percent gain from current levels. Raised Sembcorp to overweight from underweight in June following the spin-off plan.
The recently announced impairments of S $ 89 million will support the “progression of its return on equity and address investor concerns about the quality of its books,” Maheshwari wrote in a note earlier this month.
Meanwhile, Sembcorp’s shares have fallen more than 4% so far in December. That’s compared to a 1.5 percent gain on Singapore’s benchmark equity gauge.
BLOOMBERG
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