Resilience is key to Sembcorp’s 1HFY2024 results

Although Sembcorp had previous- ly guided an estimated net profit impact from the plant’s closing of $60 million to $70 million earlier in February at its FY2023 briefing, the figure was limited to around $50 million.

“We were able to reduce the financial impact through our efforts to shorten the maintenance period. We were also able to optimise our portfolio, reducing the impact from lower pool prices,” says group CEO Wong Kim Yin at the latest briefing.

While the pausing of the plant certainly contributed to the 22% y-o-y decline to $339 million in Sembcorp’s gas and related services segment, lower wholesale gas and power prices in Singapore were to blame for the drop in the group’s largest profit-generating sector.

As at end-June, the group’s contracted net profit in its gas and related services stands at above 80%, half of which is for over 10 years.

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“This is an increase from 50% in the 1HFY2023,” Wong says.

Bold plans

Sembcorp’s renewables segment similarly saw a dip, decreasing 13% y-o-y to $104 million, led by curtailment in China and a decline in earnings from the group’s batteries segment in the UK.

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Wong says China drives two-thirds of the impact, while one-third comes from the batteries segment.

He adds that the drop in demand in China stems from weaker econom- ic conditions. However, with global manufacturing still coming out of the world’s factories, he remains optimistic: “In the long term, the dynamics remain positive.”

To mitigate further risk of curtailment, Wong says that Sembcorp will be selective in identifying and investing in China, preferring projects near load sectors or net renewable power importers.

He explains: “We have, to some extent, the privileged position of being selective today. Given our unique profile, we are a foreign investor, which is highly sought after in the country. We have existing relationships that we’re leveraging on.”

With the target of growing the gross renewables capacity of 14.4GW at the end of June to 25GW of gross installed capacity by 2028, Sembcorp is keen on enhancing its reputation as a player in energy transition.

“When we look at our renewables target, the focus is on our portfolio. We have a presence in several of the fastest growing renewables markets — China is one, and the other is India, as well as across several Southeast Asian countries,” says Wong.

In 1HFY2024, 4.4GW of gross renewables capacity is under construction.

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The group has also been awarded its first utility-scale integrated 50MW solar and 14 megawatt-hour (MWh) energy storage project in Indonesia.

Net profit for integrated urban solutions business jumped 43% y-o-y to $70 million as land sales increased over 50% y-o-y to 129ha.

However, the growth was due to land sales in the second half of 2023 which was deferred into the first half of 2024.

In May, Sembcorp expanded its portfolio in Vietnam to 18 industrial parks.

With the addition of three new investment licences, the group now has a total land area of over 11,000ha in the country.

The group wants to use its expertise in renewable energy and decarbonisation to develop low-carbon industrial parks, particularly in Vietnam and Indonesia.

Urban division CEO Lee Ark Boon says: “Our 2028 target is to grow our industrial properties in Vietnam by more than 10 times to 1.5 million sq m of facilities. The immediate demand for these industrial assets is for manufacturing, but we have designed them to be reusable as modern logistics facilities as well.”

Indonesia is also a base for Sembcorp’s urban solutions business, with the 860ha Kendal Industrial Park in central Java.

Lee adds: “Kendal has benefited from a surge in foreign interest over the last two years; it has done well, and we were assessed to be the top-performing economic zone in Indonesia between 2022 and 2023.”

As part of its growth strategy for the segment, Sembcorp aims to increase its total land mass from 14,000ha to 18,000ha by 2028, distributing the expansion evenly across Vietnam, China, Indonesia, and new markets.

With an FY2028 ROE target of 10% for the segment, Sembcorp’s group FY2028 ROE target was lifted to 13% from the previously communicated 12% on Investors’ Day in November last year.

Proof is in the pudding

DBS Group Research’s Pei Hwa Ho kept her “buy” call at a lifted target price of $7.35 from $7.15, noting that the period’s net profit had beat her expectations, meeting 60% of her full-year estimates.

Ho writes in her Aug 7 report: “While its gearing level is relatively high, Sembcorp has strong operating cash flow, good access to project financing for renewable projects and 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.”

However, analyst Krishna Guha of Maybank Securities lowered his target price to $5.50 from $6.30 despite keeping his “buy” call.

“Topline and bottomline declined by low teens due to lower gas offtake and gas prices, lower power prices in Singapore and the demand-supply imbalance in China,” says Guha in his Aug 12 report.

While the analyst sees a slower ramp-up of earnings in the group’s renewable energy sector, he adds that this will be offset by a softer fall in earnings from its gas and related services business, thanks to its steady contracting strategy.

Sembcorp’s Wong concludes: “I want to emphasise that we told everyone last season that we have a contracted portfolio. I told everyone we have earnings visibility and earnings resilience. I told everyone this, but I felt that some of you didn’t believe me. This season, we have proven that when we say we’re contracted, it drops down to earnings and we have delivered.”