With former loss-making subsidiary Sembcorp Marine no longer a drag on its earnings, Sembcorp Industries was the second-best performing component stock of the Straits Times Index last year.
Even with a share price gain of 69% in 2022, The Edge Singapore believes this stock has more potential to perform this year as it moves decisively into the fast-growing market of renewable energy, with a catchy “brown-to-green” tagline to boot.
Already with gross renewable energy (including installed and under development) of 9.5 gigawatts (GW), Sembcorp Industries is almost certain to meet its own target of 10GW by 2025, which, as at end-2020, stood at just 2.6GW.
The renewable energy portfolio spans wind, solar and energy storage across Singapore, Vietnam, China, India and the UK. Sembcorp’s wind power installations, present in India and China, make up the bulk of its capacity, at some 5.65GW.
Most recently, last December, Sembcorp completed the acquisition of a 45.3% interest in Hunan Xingling New Energy, which owns 301 megawatts (MW) of installed wind power assets in Hunan Province.
The total consideration amounts to some RMB1,058 million ($204 million) for 830MW of installed renewable capacity and 62MW under development in Hunan and Guizhou. Out of the 62MW under development, 50MW has been completed and is expected to begin commercial operations by 1Q2023.
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Sembcorp also announced two other acquisitions in November: three solar projects in Hebei Province with a total capacity of 795MW, for approximately $3 million; and a takeover of Indian renewable power producer Vector Green Energy for $474 million.
In their Nov 18, 2022 note, CGS-CIMB Research analysts Lim Siew Khee and Izabella Tan estimate that these three acquisitions will add $60 million-$70 million to FY2024 ending December 2024 net profit, or some 10% to FY2024 earnings per share. Hence, Lim and Tan maintained their “add” call and target price of $4.78 on Sembcorp.
Sembcorp, notes PhillipCapital’s Terence Chua, has ruled out equity funding to finance the spate of acquisitions. “While net debt/equity will go towards 1x–2x post-acquisition, we believe the group will use the cash flows from these newly acquired assets to pay down the debt to reach its optimal gearing target of 1.3x. We believe the latest clarification will allay concerns of an equity call,” says Chua, who has a “buy” call and a $3.68 target price.
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Overall, Sembcorp “still lags behind its peers” in environmental, social and governance (ESG), says Chua. “We believe the group’s transition from brown to green has the potential to lift its environmental score rating over time. The group has committed to grow its profit contribution from its sustainable solutions to 70% by 2025 (from 35% in 2021), which could see greater interest from institutional investors looking for high ESG-ranked companies.”
For FY2022, Chua expects continued high electricity prices in Singapore and India to lift Sembcorp’s earnings. “We expect Sembcorp to pay out 16 cents of dividends (split between final and special) for FY2022, translating to a 5.3% dividend yield.”
At home, the Energy Market Authority appointed Sembcorp to build, own and operate an energy storage system (ESS) in Jurong Island in June 2022. The facility is planned to store and deliver 200MW of power for one hour, which will be able to meet the daily electricity needs of nearly 17,000 four-room HDB flats in a single discharge.
Sembcorp commissioned the facility in December with a capacity of 285 megawatthours (MWh), marking Southeast Asia’s largest ESS facility. Sembcorp's global ESS capacity across Singapore and the UK is 501MW/709MWh, which reflects total power (MW) and storage (MWh) capacity. The ESS will be accretive to earnings, says Sembcorp, but is not expected to have a material impact on its earnings and net asset value per share.
