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DBS raises Sembcorp Industries' TP to $4.50 on its 'relentless green growth'

Felicia Tan
Felicia Tan • 3 min read
DBS raises Sembcorp Industries' TP to $4.50 on its 'relentless green growth'
The new Sembcorp Energy Storage System. Photo: Sembcorp
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DBS Group Research analyst Ho Pei Hwa has kept her “buy” call on Sembcorp Industries U96

with a higher target price of $4.50 from $3.80 previously.

The higher target price, which is based on a rolled-over valuation to FY2023 based on a P/E ratio of 12x, implies an upside potential of 21%.

“We believe 10% of the rerating could come from the [around] 25% compound annual growth rate (CAGR) in renewable profit and 11% from an uplift in the valuation multiple from 10x towards 12x P/E, on the back of accretive renewable acquisitions and efficient capital recycling to fund future growth and enhance shareholder return,” Ho writes in her Feb 10 report.

The analyst likes Sembcorp’s “relentless green growth” with its “impeccable execution” of its “brown-to-green” transformation strategy in mid-2021.

“Sembcorp has accomplished its key targets way ahead of 2025,” she says. “It has quadrupled its renewable portfolio in 1.5 years to reach its target of [around] 10GW, representing [around] 60% of its total power portfolio.”

The group’s renewable remains on its growth track, she adds.

See also: Maybank upgrades MINT to 'buy' with higher TP of $2.60 after Tokyo facility acquisition

“The market is looking forward to Sembcorp’s new target for its renewable portfolio. While its gearing level is relatively high, Sembcorp has the flexibility to recycle capital, such as securitising mature, stable cash flow-generating assets,” says Ho.

“Hence, we remain optimistic on Sembcorp’s growth prospects ahead and are not overly concerned with earnings tapering off from the record high in FY2022, which was led by unprecedentedly high tariffs and profitability for conventional energy,” she adds.

Ho also notes that the company’s sustainable solutions have grown at a steady CAGR 24% over the past two years and that it could potentially accelerate to a growth of over 40% y-o-y in FY2023 with its maiden full-year contributions from the renewable energy acquisitions FY2022.

See also: Brokers’ Digest: Manulife US REIT, Pacific Radiance, Zixin Group, CLAS, Sheng Siong Group

In her view, one of the key catalysts to the re-rating of Sembcorp’s share price is the company making accretive acquisitions for its renewable energy portfolio.

“In addition, the smooth integration and delivery of an earnings increase from these renewable energy portfolios are also critical to strengthen investors’ confidence in asset quality and management’s strategy and execution,” she adds. “Efficient capital recycling to free up cash for renewable investment would also cheer up the market.”

Ahead of Sembcorp’s results on Feb 21, Ho expects the company to report a strong 2HFY2022 with “potential dividend surprises”. She has also lifted her earnings forecasts for the FY2022 to FY2023 by 5% to 11%.

As at 12.08pm, shares in Sembcorp are trading 1 cent higher or 0.27% up at $3.73.

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