Maybank Securities analyst Krishna Guha maintains “buy” on Sembcorp Industries U96 . In a report released on Sept 18, Guha raised the FY2024 earnings estimates by 6% and target price by 9% to $6.
Sembcorp’s contracted gas sales should support earnings as energy prices stabilise in Singapore and Sembcorp remains a key beneficiary of the shift to clean energy in the medium term, Guha says.
According to Guha, Sembcorp is poised to deliver more power. On Sept 17, Sembcorp announced that it would acquire ENGIE’s 30% stake in Senoko Energy, a licensed gas shipper and retailer. While pricing details are unavailable, the deal increases Sembcorp’s market share, allows them to gain access to piped gas imports and is complementary to their operations, Guha notes.
Sembcorp has approximately 10% of the generated electricity market share, compared to Senoko energy’s 15.4% market share. Senoko is also one of the four licensed importers and retailers of piped natural gas. Therefore, this acquisition is set to increase Sembcorp’s share of power generation to 15%, Guha notes.
The report states that the deal will be funded by cash and will be accretive to profits by approximately 4%. According to Guha, discussions with management showed that Senoko made losses until 2021 but generated profits of $178 million and $511 million in 2022 and 2023, respectively.
Using year-to-date prices of $170 per Megawatt Hour (MWH), Guha estimates a profit of $65 million for the 30% stake. Assuming 10 times price earnings (PE) for the sale and a 5% funding cost, there will be a profit contribution of $32 million, representing 3.6% of Sembcorp’s FY2024 estimated earnings.
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Guha notes that Senoko’s contracts are generally short term, in comparison to Sembcorp’s long-term contracted revenue profile, this creates potential for Sembcorp to upgrade and rebuild new plants backed by long-term contracts. This is supported by the Energy Market Authority’s indication that they will be building two more power plants in the north.
However, this acquisition is subject to regulatory approvals and pre-emption rights of other shareholders in Senoko.
On the flip side, Guha identified the sharp reduction in energy prices, slower contract wins, unexpected margin pressure from growing raw material and labour costs and execution misstep leading to project delays or contract terminations as potential downside factors.
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Shares in Sembcorp closed 14 cents higher or 2.6% up on Sept 19 at $5.44.
