Analysts are optimistic on Sembcorp Industries U96 , as the group recorded earnings of $540 millionfor the 1HFY2024 ended June, 2% higher y-o-y.
Following this, analysts at CGS International and DBS Group Research have both kept their respective “add” and “buy” calls on the group, with raised target prices of $7.32 from $7.01 previously and $7.35 from $7.15 previously.
Citi Research analyst Luis Hilado has similarly maintained his “buy” call, but with an unchanged target price of $6.88.
Sembcorp’s core net profit of $532 million surpassed the expectations of CGSI analysts Lim Siew Khee and Meghana Kande at 57% of their FY2024 estimates. The group’s core net profit stood at 58% of Bloomberg’s consensus estimates. This is thanks to better-than-expected contribution from the gas segment and a drop in corporate costs due to lower interest expenses.
“However, this was somewhat offset by weakness in renewable energy (RE) segment profit driven by increased curtailment of its China RE portfolio and lower average battery storage earnings in the UK,” write Lim and Kande in their Aug 6 report.
Sembcorp is also facing a higher curtailment of 200 basis points (bps) due to lower power demand, which management expects to persist in the near term, along with regular RE seasonality in 2HFY2024.
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The analysts add: “New RE capacity of 2.3 gigawatts by end-FY2024 may cushion some of the curtailment risks, in our view.”
Meanwhile, the group’s 1HFY2024 net profit of $339 million for the gas and related services segment also beat Lim and Kande’s estimate of $314 million, while the planned maintenance of Singapore cogen plant was also completed slightly ahead of schedule at a bottom line impact of around $55 million, beating the analysts’ estimate of $60 million.
“There were also opportunities to optimise on excess gas sales and benefit from low spark spread. With 97% of its gas portfolio capacity contracted and no more planned plant shutdowns for the year, we expect Sembcorp’s gas segment to return to a normalised earnings run rate of around $370 million in 2HFY2024 or $740 million per annum (p.a.).”
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Sembcorp also unveiled its long-term strategy for the integrated urban solutions (IUS) business, which made up around 10% of its FY2022 net profit. Around 85% of the business will stem from land sales, which the analysts note to be “lumpy”.
They continue: “But Sembcorp’s FY2028 return on equity (ROE) target of 10% for the integrated urban solutions (IUS) segment is backed by a shift in favour of higher recurring income contributions from industrial developments (30% to 35%) and greater allocations for Vietnam, Indonesia and new markets.”
With this, the group’s FY2028 ROE target was lifted to 13% from 12% as communicated at its Investor Day last November.
DBS’s Ho Pei Hwa’s higher target price on the group comes after the analyst has raised her FY2024/FY2025 net profit forecasts by 6% to 11%, after factoring in higher profitability for its gas and related service segment, and partially offset by slower renewable earnings.
Ho writes: “While its gearing level is relatively high, Sembcorp has strong operating cash flow, good access to project financing for renewable projects, as well as the flexibility to recycle capital through the securitisation of assets/partnerships. These allow it to continue self-funding its five-year growth plan without the need for equity fundraising (EFR).”
Her projections see the renewable segment’s profit rising at 25% compound annual growth rate (CAGR) during FY2022 to FY2028, driving 7.5% group profit CAGR during FY2024 to FY2028.
She adds: “Renewable and urban solutions could contribute 55% to 60% to group profit.”
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The analyst notes that Sembcorp’s growing renewable energy portfolio with accretive acquisitions remains its key share price driver, while continuous earnings delivery from the portfolio is also critical to strengthening investor confidence.
“Efficient capital recycling to free up cash would also cheer the market,” writes Ho.
Lastly, Citi’s Hilado derives his target price on a sum-of-the-parts valuation methodology based on Sembcorp’s different operating segments.
He writes: “The energy business (conventional and renewables) is valued at 9 times FY2025 earnings before interest, depreciation and amortisation (ebitda), roughly in-line with peers to reflect solid execution of its green transition strategy and more stable earnings base from its conventional energy segment. Its Integrated urban solutions business is valued at 0.7 times price-to-book value ratio (P/B), benchmarked against large-cap Singapore developers.”
As at 12.42 pm, shares in Sembcorp are trading 28 cents higher or 6.29% up at $4.73.
