Following the announcement of its five-year investment plan of $14 billion across renewable energy solutions, analysts from DBS Group Research, UOB Kay Hian (UOBKH), CGS-CIMB Research and PhillipCapital Securities have all maintained their “buy”, “add”, and “accumulate” calls on Sembcorp Industries U96 (Sembcorp).
All the analysts have also kept their target prices. DBS and CGS-CIMB have kept their target prices at $7.15 and $6.85 respectively, while UOBKH and PhillipCapital, too, retained their target prices at $7.20 and $6 respectively.
At its investor day, Sembcorp presented its FY2028 target to reach 25 gigawatt (GW) gross renewable energy (RE) installed capacity, up from the current level of 8.7GW.
It expects to spend $14 billion in capex from FY2024 - FY2028, 10% for hydrogen-related assets, 10% for decarbonization, and 5% for urban solutions. The capex would be funded by operating cash flow (50%), project financing (30%), and corporate debt/capital recycling/partnerships (20%).
According to DBS analyst Ho Pei Hwa, this will be done without equity fundraising. Even though Sembcorp’s gearing level has been “relatively high”, the group has a strong operating cash flow, good access to project financing for renewable projects and the flexibility to recycle capital through securitization of assets/partnerships.
“These allow it to continue self-funding the five-year growth plan without the need for equity fund raising (EFR),” says Ho. “Based on projections, the renewable segment could see profit rising at 25% CAGR (or compound annual growth rate) during FY2022 - FY2028, driving more than 7.5% group profits CAGR during the period.”
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Ultimately, she estimates that renewables and urban solutions could cumulatively contribute 55%- 60% to Sembcorp’s profit.
In addition, Ho says that Sembcorp’s steadier earnings growth and execution of its five-year roadmap are key catalysts. Gas-related assets are expected to see a milder-than-expected 2% profit decline during FY2022 - FY2028, due to its shift of locking in more long-term power purchase agreements (PPAs) from 3Q2023, leaving only a 5% spot exposure, she notes.
With more upstream gas hedges, Sembcorp will deliver more predictable and stable Singapore power earnings ahead, eliminating an earning risk concern.
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The analyst notes that Sembcorp’s growing renewable energy portfolio with accretive acquisitions remains the key share price driver for it in the current phase.
“In addition, continuous earnings delivery from the renewable energy portfolio is also critical to strengthen investor confidence,” Ho adds. “Efficient capital recycling to free up cash would also cheer the market.”
Ho also highlights that Sembcorp has achieved most of its 2025 targets ahead of time, in which the key 10GW gross installed renewable capacity target would be met in 2024, with the completion of the bulk of its projects currently under development.
Meanwhile, its emission intensity nearly halved to 0.3 tCO2e/MWH (vs. the target of 0.4) while financial metrics (return on equity (ROE), debt/ebitda, ebitda/interest) are all tracking above targets as well, she says.
As Sembcorp has had a strong financial performance from FY2020 - FY2022, and a prudent interest rate management, Ho reiterates her “buy” with a target price of $7.15, based on a 14x FY2024 P/E, in line with regional peers’ average.
“This implies a 45% upside potential. We believe 40% of the rerating could come from the [around] 25% six-year CAGR in renewable profit and 60% from an uplift in the valuation multiple from a 10x forwards 14x P/E, on the back of accretive renewable acquisitions and steady earnings delivery,” she adds.
Likewise, CGS-CIMB analyst Lim Siew Khee, notes that including projects under development, Sembcorp has about 12GW of RE capacity in its portfolio, 53% of which comes from wind (6.3GW), 39% from solar (4.7GW), and 8% from energy storage (909 MWh).
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With a target of about 50% mix for solar, Sembcorp implies it will need to add about 7.8GW of capacity through solar projects by 2028, in which new RE capacity is expected to primarily come
from projects in India, Singapore, Vietnam, Indonesia, the UK and the Middle East, Lim adds.
“Sembcorp will thus reduce its portfolio exposure to China from 62% as of Sept 30, 2023 to about 45%, it aims to reduce its emissions intensity to 0.15tCO2e/MWh (from 0.30tCO2e/MWh in 2023),” the analyst says.
Based on the management’s guidance for annual net profit (before EI) CAGR of 25% for RE and -2% for conventional energy (CE) in 2022-2028, along with its planned financing structure (as above), Lim’s preliminary calculations show that its overall ROE target of 12% by 2028 appears achievable.
While Sembcorp has said that it will be willing to take on additional debt if its unable to meet its capital recycling target, Lim says that the additional debt would have a marginal impact on its net gearing ratio.
As such, Lim reiterates her “add” call with an unchanged target price of $6.85, based on 14x FY2023 PE.
“Our current estimates have not included any potential accretion from the planned new investments. Re-rating catalysts include stronger-than-expected CE profits and sizeable earnings accretive to RE mergers and acquisitions, while downside risks include prolonged unplanned shutdowns of assets, and unfavourable regulatory changes impacting its operations and earnings,” she says.
Similarly, UOBKH’s analyst Adrian Loh says that Sembcorp looks “well-placed to remain a key holding in investors’ portfolios in the long term” with the upgrade of renewable capacity targets, guidance for relatively stable baseload earnings from conventional energy, and blue sky option via hydrogen, ammonia and renewable energy imports.
However, Loh notes that Sembcorp will look to source for brownfield projects in Vietnam and greenfield projects in Indonesia, which may not be so great for Singapore residential consumers in the medium to long term given that these “green electrons” are higher cost and will be passed on to the customer.
He adds that Sembcorp’s venture into ammonia may take a long term to gain commerciality, with the added problem of its competing usage as fertiliser. But hydrogen appears to be at the forefront of Sembcorp’s thinking with it taking the lowest risk pathway towards incorporating it into Singapore’s future energy mix, he notes.
“Given that energy comprises around 65% of the cost of hydrogen production, renewables (which Sembcorp has in abundance in countries that have supportive policies) will be a key ingredient for success. In Singapore, Sembcorp’s current J-class power plants can be retrofitted to use 30% (and up to 50%) of hydrogen, thus potentially extending the life of the power plants,” says Loh.
As such, the analyst maintains his “buy” with a target price of $7.20 based on a target P/E multiple of 13.6x.
This target P/E multiple is 1.5 standard deviation 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 his 2024 earnings per share (EPS) estimate which he believes is a better reflection of the company’s “normalised” earnings compared to 2022’s earnings.
“Sembcorp, cognizant of its funding needs for growth, will likely keep its dividend payout ratio at 25%,” he adds.
Finally, Peggy Mak of PhillipCapital estimates that the renewable portfolio could account for 50% of net profit by FY2028. Although these assets generate a lower ROE of 10% (vs 15% for CE), the higher valuation multiples accorded to these assets could lift Sembcorp’s valuation further down the road, she notes.
“We maintain our earnings estimates for FY2023 and FY2024. The energy earnings are intact, while earnings at integrated urban solutions remain muted due to the lukewarm Vietnam property market,” she says. “We maintain “accumulate” with a target price of $6.”
Shares in Sembcorp closed 7 cents down or 1.37% lower at $5.05 on Nov 10.
