During a media and analysts’ briefing by Sembcorp Industries U96 (Sembcorp) of its FY2023 results, group CEO Wong Kim Yin made a few points — and the most important for investors is that earnings and cash flows from the group’s largest contributor is likely to be sufficiently stable for it to announce a higher ordinary dividend which Wong sees as sustainable.
Sembcorp’s business model is different from Keppel’s. At the height of the oil and gas boom in the early 2010s, Sembcorp and Keppel through their subsidiaries were the world’s two largest rig builders.
Since then, both companies are pursuing the green agenda albeit by taking different paths. Keppel, as has been widely articulated, has gone down the asset-light route, transforming itself into an alternatives assets manager, where it pursues infrastructure and other projects through funds, trusts and REITs. Keppel undertakes the building and operating part of the value chain, with its funds, trusts and REITs being offtake vehicles for the assets’ stabilised cash flows.
Keppel’s green energy solutions include Keppel Sakra Cogen Plant, a hydrogen-ready power plant, as well as green data centre solutions and the Bifrost subsea cable system, a trans-Pacific cable system, enhancing connectivity between Southeast Asia and North America.
Both Keppel and Sembcorp could be potential beneficiaries of Budget 2024. On Feb 16, Deputy Prime Minister and Finance Minister Lawrence Wong announced a Future Energy Fund to be set up with an initial injection of $5 billion to help Singapore transition to low-carbon fuels.
Sembcorp’s Wong says: “The $5 billion is aimed at providing the infrastructure that will support the ‘third switch’, to support developing low-carbon feedstock solutions. We’re positioning ourselves for low-carbon feedstock imports from the region, and carbon trading. For instance, if the monies are directed at providing transmission infrastructure, that could help us bring in [low-carbon] electricity.”
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The “switches” Wong refers to are: the first switch from oil to natural gas, seen as a transition fuel; and the second switch to solar power. In Singapore, Sembcorp has a solar farm in Tengeh. In December, Sembcorp was awarded a contract by JTC to generate 117MWp from solar energy on Jurong Island, to support industrial estates. The solar deployment on Jurong Island will cover 60ha of interim vacant land, and the rooftops of five JTC buildings, including the Jurong Rock Caverns above-ground facilities and Jurong Island Checkpoint.
The third switch is to explore ways to tap on regional power grids to access cost competitive energy. Singapore needs transmission infrastructure, to bring low-carbon electricity to the island from solar farms in the region, and most notably from Australia, where finance is required for the Australia-Asia PowerLink cable project.
Keppel vs Sembcorp
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When asked if Sembcorp would go down Keppel’s asset-light model of growing assets under management and relying on fee income for stable earnings and cash flow, Wong says, on the sidelines of a results briefing on Feb 20: “What we are focusing on now are our targets announced on Nov 6, 2023. The strategy is to find ways to fund our growth and to enhance our returns. There are various ways of capital management that can get us there.”
Back in 2022, Keppel revealed its Vision 2030, and last year, Keppel group CEO Loh Chin Hua announced a restructure that transformed Keppel from a conglomerate to an alternatives asset manager, albeit focusing still on familiar sectors such as infrastructure, green energy transformation and urban solutions.
“We unveiled the next phase of our Vision 2030 transformation, shedding our conglomerate structure to become a global asset manager and operator,” Loh had said on Feb 1.
Loh also announced a target AUM of $200 billion. Following the acquisition of Aermont Capital, a European real estate manager to be completed this year, AUM in FY2024 is likely to be around $79 billion.
The composition of Keppel’s profits is very different from what it was a few years ago, when the majority of its earnings were from the lumpy offshore and marine (O&M) orderbook business and the property trading business. Keppel is no longer a rig builder, divesting its rigs in exchange for “vendor notes”. Instead of property development, it wants to be a global asset manager and operator, with segments such as Infrastructure, Real Estate and Connectivity. According to Loh, these three segments contributed positively to Keppel’s FY2023 earnings.
As a real estate manager rather than a developer, Keppel is somewhat insulated from the lumpy fair value gains and losses on its investment properties, with the REITs taking the impact. “While earnings from Real Estate were lower year on year, the segment continued to perform creditably and contributed significantly to our net profit, despite challenging conditions in markets like China,” Loh had said.
Interestingly, in November last year, Sembcorp had an investors’ day when it announced plans to accelerate its renewables energy growth. Its target of attaining 10GW of gross installed renewables capacity by 2025 is at hand, and a new target of gross installed renewables capacity of 25GW by 2028 was announced. Sembcorp’s business units comprise gas and related segments, renewable energy, urban solutions, and decarbonisation.
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On its decarbonisation front, Sembcorp has already achieved its 2025 emissions intensity target. By 2028, Sembcorp aims to halve its current emissions intensity. The company is committed and on track to achieve its targets of reducing absolute emissions by 2030, and net-zero emissions by 2050.
Wong is keen to highlight Sembcorp’s strengths: “In China, we have partners. In India, we have the advantage of having a very solid team on the ground which is very rare among international players and we are able to build our portfolio quickly. We have a gross renewables capacity of 4.2GW in India now and we want to get to 8–9GW. Once we get to a certain size, we will be able to command a premium when we seek to recycle capital.”
The main overlap with Sembcorp is Keppel’s Infrastructure division, which continues to pursue opportunities in renewables, clean energy and decarbonisation solutions. At the same time, it is expanding its long-term contracts to provide earnings visibility.
During Keppel’s results briefing, CEO Loh highlighted chipmaker GlobalFoundries’ power purchase agreement (PPA), under which Keppel has been providing electricity to power its Singapore operations for more than 15 years. “As at end2023, about 60% of our generation capacity was contracted for three years and above,” Loh said.
Similarly, in 2023, Sembcorp’s long term PPAs with its customers have been locked in, as has the supply of its natural gas. Sembcorp has an 18- year PPA with another chipmaker Micron Semiconductor to supply up to 450MW a year; an 8 to 10-year PPA to supply ST Telemedia with up to 100MW a year; and an 8 to 10-year PPA with Singapore Telecommunications Z74 with an annual contract value of $180 million. This translates into an average contract tenure of 12 years for Singapore’s gas portfolio. In the meantime, Sembcorp has diversified its existing gas supply with a $1.9 billion gas sales agreement to import gas from the Natuna gas field.
Stable income for dividends
In FY2023, the gas and related segments contributed $809 million of net profit to Sembcorp’s total net profit of around $1.02 billion (excluding a non-cash loss of $78 million). According to Wong, this segment will continue as a “very stable cash flow and earnings contributor”, enabling Sembcorp to announce an ordinary dividend of 13 cents as in FY2023, a payout of around 24%.
“Our gas and related segments are a very big part of our earnings and cash flow base. This season, our confidence level in our future earnings and cash flow is much better than last year (2022). We are prepared to say our ordinary dividend shall be 13 cents moving forward. That is a very important signal because of our confidence in our biggest earnings space because we are locked in and no longer exposed [to volatile pricing],” Wong says.
Although revenue fell by 14% y-o-y in 2H2023, and by 10% in FY2023, net profit rose by 38% y-o-y in FY2023 to $1.02 billion. “Revenue or turnover can come down materially, and yet, our earnings can stay [up]. That [speaks to] the strength of the contracts. Moving forward, revenue can be up and down. But as long as we continue to deliver the megawatt hours, this delivery is underpinned by the contract that will be in place. Then we are confident about earnings and our cash flow, and we can then fund our growth,” Wong continues.
“We believe 2H2023 profit for the gas and related services segment of $374 million (–14% h-o-h, +15% y-o-y) is a good baseline given that the long-term contracts signed with Micron, Singtel and ST Telemedia have started to kick in,” notes CGS International.
As at end-December, 99% of its Singapore gas power portfolio is contracted, of which 74% is more than five years and 25% ranged from 0–5 years. On the other hand, CGS estimates some $70 million of revenue from gas and related services is likely to be lost because of a maintenance shutdown in 1H2024.
In its FY2022 annual report, Keppel says it does not have a specific dividend policy, but it has “endeavoured to pay out about 50%–60%” of its earnings. Keppel’s FY2023 cash dividend of 34 cents is a tad higher than 33 cents in FY2022.
In terms of capital management, Sembcorp’s gearing at more than 1x is higher than Keppel’s 0.9. However, Sembcorp has been recording free cash flow of more than $1 billion for the past two years (FY2023: $1.3 billion) while Keppel’s free cash flow has been negative in FY2022 and FY2023.
Like a bond
Wong likens financing infrastructure projects to owning a bond. “These are projects with longterm contracts with long-term cash flow. It’s like a bond. When rates are high, you don’t sell a bond. That’s a consideration when thinking about capital recycling. At this stage of development there is no gun to our heads. We have the availability of funding, in terms of returns we are getting, we are meeting our long-term targets, when market conditions are the most conducive to divesting,” he says.
Analysts are expecting that Sembcorp may look to divest its more volatile UK battery business. Contributions from the UK were lower in 2023 versus 2022 due to lower power prices.
“We are assessing which are the parts of the portfolio that can give us our growth, which parts fit well with our growth path. For those that don’t, they are divestment candidates in terms of considering portfolio options,” Wong says.
In Myanmar, Sembcorp Myingyan Power Company experienced an impairment. According to CFO Eugene Cheng, the power plant is in the area where Myanmar’s rebels are having skirmishes with the Myanmar military, increasing its risk profile. The Myanmar power plant’s receivables were estimated at $334 million. Out of this, Sembcorp has written off $131 million.
Elsewhere, Sembcorp had to account for an unrealised foreign exchange loss of $78 million resulting from the depreciation of the INR against the SGD for the fair value of its Deferred Payment Note (DPN) in 2H2023. The DPN is the payment for the sale of Sembcorp Energy India (SEIL) to a consortium.
Maybank warns that lower power prices and higher funding cost should weigh on Sembcorp’s FY2024 earnings with partial offset from higher renewable revenue. However, Maybank retains its buy recommendation because of the company’s renewable energy portfolio, the long-term PPAs, and divestment of non-core assets.
“We are single-minded and will leverage on our strength to build up our portfolio, and at the right time we will consider various capital management levers to enhance value for our shareholders,” Wong says
