Analysts from UOB Kay Hian, DBS Group Research, OCBC Investment Research and CGS-CIMB Research have reiterated their “buy” calls for Sembcorp Industries and raised their target prices (TP) to $4.10, $3.80, $3.60 and $3.80 from $3.59, $3.70, $2.90 and $3.66 respectively, while Maybank Securities raised its TP from $3.40 to $4.50 after initiating coverage for the stock with a “buy” call on Aug 2.
On Aug 5, Sembcorp, the Straits Times Index’s (STI) top performer this year, announced its impressive set of 1HFY2022 results, recording a turnover of $4.8 billion, up 45% from $3.3 billion in 1HFY2021.
Surging energy prices have powered Sembcorp to mark a net profit before exceptional items of $490 million, up 94% from 1HFY2021. Its conventional energy segment turned a profit of $397 million, up 115% for the same period from a loss-making first half last year, as higher electricity prices in Singapore and India were assisted by realised gains from favourable gas hedges the company entered in 2021.
At its earnings release, Sembcorp also announced that in view of its “strong underlying performance”, an interim dividend of 4 cents per share will be paid on Aug 23, with a potential special dividend at the end of the year.
UOB Kay Hian’s Adrian Loh says that Sembcorp’s 1HFY2022 “blow out numbers” were significantly better than expected and beat consensus expectations “easily”, with the renewables segment a standout feature of the earnings release. “In our view, the highlight was the renewables segment which saw broad-based growth from all of its three key markets: solar operations in Singapore benefited from high spot electricity prices, its newly-acquired projects in China started contributing in 1HFY2022 and higher wind-power generation in India,” he writes.
His higher target price of $4.10 is based on an unchanged target P/E multiple of 13.6x. “This target P/E multiple is 1 standard deviation (s.d.) above the company’s past five-year average P/E of 10.1x, excluding 2020 where the company reported impairment-related losses, and is applied to our 2023 earnings per share (EPS) estimate which we believe is a better reflection of the company’s “normalised” earnings compared to 2022’s earnings,” writes Loh.
He adds: “We note that on both P/E and P/B basis, Sembcorp trades at a discount to its utilities peers in developed Asia. We continue to foresee an upward re-rating of the company’s valuation multiples due to the scarcity value of solid ESG companies in Singapore, and as the company continues to build out its green energy portfolio. Sembcorp remains one of our top picks in Singapore for the quality of its earnings as well as its growth prospects in the near to medium term.”
Meanwhile, Maybank’s Kelvin Tan says his TP for Sembcorp has increased with its “all-around solid performances” from its conventional and renewable energy segments and stable integrated urban solutions. “We raise our FY2022 to FY2024 profit by 76% to 82% as we anticipate earnings outperformance to accelerate in 2HFY2022. Heightened spark spreads in Singapore and India coupled with full year earnings from its newly acquired renewable portfolio in China presents an excellent opportunity to accumulate after pullback, in our view,” writes Tan.
Tan notes that Sembcorp’s “brown to green” transition is “well ahead” of schedule, with the company’s gross renewables capacity, including the 0.9 gigawatts (GW) of renewables projects
secured in 1HFY2022, totalled 7.1GW, well ahead of its 10GW 2025 target.
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OCBC’s analysts say with their slightly more conservative TP that overall, Sembcorp is continuing to “pivot in the right direction” towards renewables and its ability to deliver higher ROE support share price performance. Their increased TP also incorporates an ESG premium, which was upgraded in April with Sembcorp reclassified to the utilities industry from industrial conglomerates due to the demerger between Sembcorp Industries and Sembcorp Marine.
OCBC cites Sembcorp’s intention to continue growing its renewable energy portfolio and efforts to reduce its carbon intensity including the use of cleaner energy and operational efficiency measures as key drivers for its upgraded ESG rating.
Ho Pei Hwa of DBS adds that Sembcorp’s earnings “blew past” her estimates, with its $490 million net profit making up 93% of her previous full-year forecast, which was already 5% above consensus. Although this performance was “driven” by its conventional energy segment, she notes that “maiden contributions” from recent acquisitions in China also assisted the growth of Sembcorp’s renewables segment, which now accounts for 16% of group headline profit.
“Acquisitions of SDIC New Energy (35% stake) and Shenzhen Huiyang New Energy (HYNE, 98% stake) were completed in January and June 2022. They contributed a profit of $23 million and $7 million, excluding interest expenses, respectively in 1HFY2022,” Ho writes.
However, she also points out that the earnings saw a $91 million boost from gas hedges in 2021 and other income that are “not recurring”, with the unwinding of gas hedges occuring due to the cancellation of cargo expected in 1HFY2022.
UOB Kay Hian’s Loh similarly notes that the company booked “one-off” hedging and other income gains of $92 million in 1HFY2022 that is “unlikely to be repeated”, while increasing Sembcorp’s forecasted earnings for the period of 2022 to 2024 with the “largest upgrade” for 2022 of 47%. Nonetheless, he says that its initial 2023 to 2024 forecasts were “conservative” to account for higher operating expenses and interest income after the inclusion of Sembcorp’s recent renewables acquisitions in China.
Maybank’s Tan says that Sembcorp’s outlook remains “rosy”, with electricity price hikes in Singapore and India likely to continue amid rising input costs and gas production outages. “As such, we project conventional energy (+25% y-o-y) underlying earnings to stay resilient in 2HFY2022 and renewables (+30% y-o-y) to be boosted by full year performance of its recent China portfolio acquisition.”
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“Management declared an interim dividend of 4 cents (+60% y-o-y) which exceeded expectations. We think that management will mark this outperformance with a special dividend in FY2022,” adds Tan, noting that key risks to his projections are global inflationary concerns with rising interest rates and borrowing costs in China which would hurt margins and prolonged shutdowns of Sembcorp’s scheduled maintenance for facilities in India and the UK.
CGS-CIMB analysts Lim Siew Khee and Izabella Tan have upped their EPS estimates for the FY2022 to FY2024 by 30.8% to 55.6%, although they see Sembcorp's earnings from its conventional energy segment dip in the 2HFY2022 and normalise in the FY2023 to FY2024.
The forecast factors in a "conservative" 20% decline in Uniform Singapore Energy Price (USEP) prices should oil prices fall. It also takes into account the maintenance shutdowns in the 2HFY2022 and a 200MW power purchase agreement (PPA) with the Bangladesh Power Development Board, which commenced in 2QFY2022.
On this, Lim and Tan forecast a 43% h-o-h decline in conventional energy earnings in 2HFY2022. We have also lowered the segment's revenue in the FY2023 by 10% assuming normalisation of Indian Energy Exchange (IEX) tariffs and USEP prices.
Meanwhile, the analysts have lifted their renewables revenue forecast by 64.6% to $127 million in FY2022.
"This assumes $18 million contribution from SDIC New Energy, $25 million half-year contribution from HYNE and the absence of $11 million in mergers and acquisitions (M&A) costs. Stronger renewables and conventional energy earnings could be partially offset by lower growth for IUS on weaker land sales in China and Vietnam," they write.
As at 1.33pm, shares in Sembcorp were trading 1 cent or 0.31% up at $3.19.
