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Analysts increase Sembcorp's TP to due to 'sustainable growth strategy'

Felicia Tan
Felicia Tan • 4 min read
Analysts increase Sembcorp's TP to due to 'sustainable growth strategy'
The new Sembcorp Energy Storage System. Photo: Sembcorp
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Analysts from CGS-CIMB Research and OCBC Investment Research (OIR) are remaining positive on Sembcorp Industries’ prospects, with unchanged “add” and “buy” calls.

The analysts from both brokerages have also upped their target price estimates. CGS-CIMB’s Lim Siew Khee and Izabella Tan have increased their target price to $5.12 from $4.78 previously.

“With two-thirds of its conventional energy (CE) capacity locked in for two to three years since 2022, we expect CE’s net profits to remain high in FY2023,” the analysts write in their Jan 27 report.

The analysts previously factored in a 15% y-o-y decline in Sembcorp’s CE earnings as well as a 10% reduction revenue in the FY2023 on the back of falling Uniform Singapore Energy Prices (USEP) and Indian Energy Exchange (IEX) prices amid lower oil prices.

That said, they note that the USEP has fallen by 20% h-o-h to an average of $259/kwh in 2H2022 but still elevated at an average of $275/kwh or 5% below the 2022 average.

“With the completion of the sale of its Indian coal plants (SEIL) on Jan 19, Sembcorp will start to deconsolidate the coal operations from FY2023, replaced with interest repayment from the deferred payment note (DPN),” the analysts write.

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“All in, we expect CE earnings to fall 28% y-o-y in FY2023 to $459 million but this should be offset by a $174 million pre-tax interest income from Tanweer, the purchaser,” they add.

Sembcorp’s renewables acquisitions are also bearing fruit. The group completed the acquisitions of SDIC New Energy (SDIC) and Shenzhen Huiyang New Energy (HYNE) in January 2022 and June 2022 respectively. SDIC contributed $23 million of associates profit while HYNE contributed $7 million of profits for its one-month contribution in June 2022.

“2HFY2022 should see steady contributions from these acquisitions in its Renewable Energy (RE) segment. Going into FY2023, we can expect RE to grow 15% y-o-y with the addition of three acquisitions – BEI Energy Development, Vector Green, and Xingling New Energy,” note the analysts.

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“We like these acquisitions for their stability of earnings as they are mostly contracted to the state grid at fixed tariffs, according to Sembcorp. As at December 2022, Sembcorp had c.9.4GW of RE assets (3.1GW solar, 5.6GW wind, 0.6GW batteries),” they add.

In addition to their higher target price, the CGS-CIMB analysts have lifted their net profit forecasts for the FY2022 to FY2024 by 3% to 11% on higher net profit contributions from the CE business and growth of its RE business on acquisitions. The interest payments from the sail of its Indian coal plants are also another factor behind the analysts’ net profit forecast increase.

“Our target price is still based on 12x CY2024 P/E, a 20% discount to regional utilities peers due to smaller market cap,” they write.

Stronger-than-expected profits from Sembcorp’s RE and CE businesses, as well as earnings accretive mergers are rerating catalysts whereas prolonged unplanned shutdowns and unfavourable regulatory changes impacting operations are key risks.

OCBC sees sustainable growth strategy from Sembcorp

The research team at OCBC Investment Research (OIR) have also increased its fair value estimate to $4.20 from $3.60 previously. The higher fair value estimate is on rolled over valuations. It also incorporates an environmental, social and governance (ESG) premium.

To the team, Sembcorp has executed its brown-to-green transition plan well. Since the group unveiled its plan to do so, it has more than doubled its renewable energy capacity to 9.4GW gross (compared to the target of 10GW by 2025), delivering higher return on equity (ROE), and announcing the sale of its Indian coal plants, notes the OCBC team.

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In its report dated Jan 27, capital recycling is likely to be increasingly in focus with potential partial stake sales and listing of assets in yield vehicles, adds the team.

“[Capital recycling] could help the group unlock value in its current assets and grow its renewable portfolio further”, it continues. “The use of third-party capital would be helpful in allowing the group to not be bogged down by an asset heavy business.”

“The success of this strategy also has implications on whether the company may need to turn to capital raising to fund its continued transformation and next stage of growth.”

Overall, the team sees the group’s direction towards renewables as “right”.

On the group’s slight dip in its share price recently, the team said that it was not surprised to see the stock take a “breather” after its 70% share price rally in 2022.

Sembcorp is due to report its results for the FY2022 on Feb 21.

Shares in Sembcorp closed 2 cents lower or 0.56% down at $3.57 on Feb 3.

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