Following Sembcorp Industries U96 ’ 1HFY2024 higher earnings of $540 million, PhillipCapital analyst Paul Chew has upgraded his call from “accumulate” to “buy” at a raised target price of $6.27 from $6.00 previously, while Maybank Securities’ Krishna Guha has likewise kept his “buy” call albeit at a lowered target price of $5.50 from $6.30 previously.
The optimistic calls of both analysts join that of their peers.
Chew notes in his Aug 12 report that while the group’s revenue for the 1HFY2024 was “within expectations”, profit after tax and minority interests (patmi) for the period beat his expectations, forming 64% of his FY2024 forecast.
He adds: “Associate and deferred payment note (DPN) income were higher than expected due to urban land sales and foreign exchange (forex) gains.”
Meanwhile, in the absence of large spot gains of $60 million and plant maintenance of $50 million, the 1HFY2024 normalised patmi declined 11.6% y-o-y to $532 million.
“Power curtailment in China negatively impacted renewables. However, more than 80% of the gas power earnings have been possibly contracted on spot rates,” writes Chew.
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On the outlook of Sembcorp’s gas sector, the analyst notes that the 2HFY2024 will be stronger than the 1HFY2024 due to the completion of planned major maintenance in Singapore plus long-term contracted power contracts with fixed dollar spark spreads.
“Growth will only occur with the completion of the new 600 MW power plant in Jurong by FY2026. Separately, no impairment triggers in Bangladesh and Myanmar because payments have been on schedule.”
In the renewables sector, the analyst expects Sembcorp to record a “seasonally weaker” 2HFY2024, although the completion of a 2 GW project will help provide some “offset”.
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Chew continues: “Most (projects) will be in 4QFY2024 and fully impact earnings in FY2025. The target of almost doubling gross renewables capacity from 12.9 GW in FY2023 to 25 GW in FY2028 is unchanged.”
He adds that the group has a target to grow its current 14,000 ha of land for planned development in 1HFY2024 to 18,000 ha by FY2028 in its long-term urban strategy.
“The target growth for industrial properties (or ready-built factories and warehouses) is from 130,000 in March FY2024 to 1.5 million by FY2028. The three key markets are Vietnam, China, and Indonesia.”
Meanwhile, Chew sees the environment in India to grow capacity as “positive”, driven by renewable energy initiatives launched by Indian authorities and Sembcorp’s securing of land rights and local expertise.
Similarly, despite near-term weak power demand and curtailment issues, the analyst notes that “there remain opportunities to expand renewables capacity in China”, thanks to the group’s partnering with local state entities in provinces with growth potential in renewable energy.
Consequently, Chew has raised his FY2024 earnings by 10% y-o-y to $912 million, and his upgraded call stems from Semcorp’s “recent weakness” in its share price.
He concludes: “Sembcorp will enjoy stable earnings and cash flow from gas operations, while renewables will benefit from the 52% growth in capacity under construction.”
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On the other hand, Maybank’s Guha has lowered his target price due to the “demand-supply imbalance in China renewables and the evolving energy landscape in Singapore”, with a lowered price-to-earnings ratio (P/E) multiple of 10 times from 12 times P/E previously.
On Semcorp’s renewables sector, Guha writes that profit fell 13% y-o-y to $104 million “due to higher curtailment rates” in China and lower profitability in the UK.
“In the long term, Sembcorp is the prime beneficiary of the shift to clean energy,” concludes the analyst.
Upside swing factors noted by him include stronger-than-expected order wins from its key sectors, improving margins due to continued cost controls and economies of scale, and a higher dividend payout due to better earnings or an improved cash flow outlook.
Conversely, downsides include a sharp reduction in energy prices, slower contract wins, unexpected margin pressure from rising raw material and labour costs and lastly, execution missteps leading to project delays or even termination of contracts.
As at 1.46pm, shares in Sembcorp are trading 11 cents lower or 2.32% down at $4.64.
