SINGAPORE (May 7): OCBC Investment Research is keeping its “buy” call on Sembcorp Industries (SCI) with an unchanged fair value estimate of $3.59 ahead of long-term positives in the energy market.
SCI is “in for the long term,” says lead analyst Low Pei Han in a Friday report. “Over the longer term, SCI will seek to position itself for the global energy transition in terms of a changing global fuel mix, higher demand for renewables, proliferation of distributed energy resources and declining power prices.”
“The share of electricity as a proportion of total energy demand is also rising in part due to the electrification of the heating and transport sectors, and SCI is well-placed to benefit,” Low adds.
In the nearer future, the analyst believes SCI will benefit this year from an expected turnaround in India.
“Looking ahead, Utilities should deliver a better performance in 2018 underpinned by an expected turnaround to profitability for its India energy operations by the end of the year,” Low says.
According to Low, there are currently few long-term power purchase agreement (PPA) contracts in the market for India, and SCI is seeking to replace its expiring contracts for Sembcorp Gayatri Power Limited (SGPL) with some higher-value shorter-term contracts.
“Meanwhile there are signs that medium term PPAs are starting to come to the market,” Low adds.
In the 1Q18 ended March, SCI saw its revenue grow 30% to $2.8 billion, even as earnings tumbled 34% to $76.6 million on lower non-operating income as well as lower share of results of associates and joint ventures.
See: Sembcorp's 1Q earnings down 34% to $76.6 mil on absence of one-offs
As at 12.01pm, shares of SCI are trading 1 cent higher at $3.05, implying an estimated price-to-earnings ratio of 15.9 times and a dividend yield of 1.6% for FY18.