Credit Suisse analyst Shaun Tan has kept his “outperform” call on Sembcorp Industries.
He sees the utilities company, which is the biggest gainer among all 30 Straits Times index component stocks this year, enjoying a bigger advantage in its business of importing natural gas.
Come 2023, one of the piped natural gas contracts between Singapore and Indonesia might not be renewed.
Sembcorp Industries, one of the existing importers of piped natural gas, has an existing contract that will last till 2028.
Currently, Singapore relies on natural gas for some 95% of its power needs, while it tries to grow the proportion of renewable energy.
Within the natural gas market, Singapore uses both liquefied natural gas, as well as piped natural gas, which is cheaper.
Assuming the other supplier’s contract isn’t renewed next year, it means Singapore will need to lean more heavily on LNG. This means Sembcorp Industries’ existing PNG business will enjoy a bigger cost advantage.
“Sembcorp Industries’ fuel cost advantage for its Singapore power generation business vs market could be larger going forward,” writes Tan in his April 11 note.
Separately, Sembcorp Industries has been investing heavily in renewable energy in markets such as China and India.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
“The ongoing green transition, favourable Singapore electricity dynamics, undemanding valuation and attractive risk-reward keeps us positive on SCI,” says Tan.writes Tan in his April 11 note.
He has adjusted his FY2022 to FY2024 earnings estimate for Sembcorp Industries by 5 to 13% to take into account the better earnings seen from its Singapore operations, along with a higher target price of $3.30 from $3 previously.
Sembcorp Industries shares as at 2.45 pm changed hands at $2.87, up 1.06% thus far for the day and up 42.79% year to date.
