Analysts are optimistic on Sembcorp Industries (SCI) U96 , as the group recorded earnings of $530 million for the 1HFY2023 ended June 30, 8% higher y-o-y.
The group’s strong performance for the 1HFY2023 was driven by the conventional energy (CE) segment earnings attributable to high Uniform Singapore Energy Price (USEP).
The CE segment saw higher power prices in the Singapore electricity market and increased operational capacity in the renewables segment, contributing some $435 million or around 72% of group profit in 1HFY2023.
Meanwhile, the renewables segment net profit grew 54% y-o-y to $117 million, contributing around 20% to group profit. This was mainly driven by acquisitions in China and India, new energy storage systems as well as elevated power prices for the solar operations in Singapore.
SCI also secured 2.1 GW of renewables capacity in 1HFY23 through acquisitions and organic growth across key markets, bringing the group’s renewables capacity to 11.9 GW. The sustainable solutions segment registered a compound annual growth rate (CAGR) of 24% in the past two years and this could accelerate to 40% y-o-y growth in FY2023 with maiden full-year contribution from renewable acquisitions in FY2022.
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Following the healthy set of results, DBS Group Research, Maybank Securities, Citi Research, OCBC Investment Research and CGS-CIMB Research have all kept their “buy” and "add" calls, with raised target prices.
DBS has raised their target price to $7.15 from $6.50, Maybank to $6.30 from $6.10 previously, Citi to $7.13 from $5.60 previously, OCBC to $7.11 from $6.12 previously, and lastly CGS-CIMB to $6.85 from $6.20 previously.
Following SCI’s strong results, DBS’ analyst Ho Pei Hwa now expects a higher final dividend of 5 cents and a special dividend of 3 cents in 2HFY2023, bringing the full-year payout to 13 cents, up from 12 cents in FY2022.
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Ho also believes that 40% of the group’s raised target price could come from the “[estimated] 33% three-year CAGR in renewable profit and 60% from an uplift in the valuation multiple from 11x towards 14x P/E.”
This is in line with the 25% payout ratio, implying an around 2.3% dividend yield.
Looking at the group’s strong CE profits, Ho believes that the temporary price cap (TPC) which has come into effect July 1 should provide some moderation.
The analyst continues to note that if TPC were in place in 1HFY2023, profits would be impacted by $60 million before tax, or about 8% of conventional energy profits.
Ho also points out that Singapore power earnings will be steadier going forward with measures in place to reduce merchant risk.
Firstly, a higher percentage of capacity will be contracted from 2HFY2023, from two thirds to about 80%, along with the commencement of a long term purchase price allocation (PPA) with Singapore Telecommunications (Singtel), starting Oct 1 and taking up around 70 MW to 80 MW for 10 years. Another 18-year PPA with Micron to supply up to 450 MW of power is scheduled to begin with 350 MW in 2HFY2023.
Secondly, SCI will be the largest gas importer in Singapore, ensuring gas supply for its power plant and as an effective hedge against gas price fluctuations.
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Meanwhile, DBS understands that the gross installed capacity totaled 8.6 GW as of end-Jun, of which 5.6 GW is attributable to SCI, will see an additional 3.3 GW capacity come online in the next two years.
“This should drive around 38% growth in renewable installed capacity in the next two to three years, boosting organic growth,” writes Ho.
On integrated urban solutions however, net profit declined 23% y-o-y to $48 million, due to lower contributions from waste business in Singapore as well as lower land sales in Vietnam, partially mitigated by higher land sales in Indonesia. DBS expects land sales to gradually pick up with resumption of economic activities post-full reopening in Vietnam.
Overall, DBS is pleased by SCI’s 1HFY2023 results, raising their forecasts in the process.
“We are raising our FY2023/FY2024 profit forecasts by 26%/16% in anticipation of higher spark spreads in Singapore, supported by tight supply/demand till new supply comes online by 2026. This was partially offset by lower estimates for Integrated Urban Solutions,” says Ho.
Key risks observed by the analyst include greater-than-anticipated compression of Singapore's electricity spark spreads and execution hiccups in the company’s renewable energy plans.
Concurrently, Maybank Securities analyst Kelvin Tan is also positive on SCI’s 1HFY2023 results, which topped his and consensus’ forecasts.
“The market is anticipating positive news for SCI, like its new renewable capacity target, potential inclusion into Morgan Stanley Capital International (MSCI) and further capital recycling with partial stake sales in ageing assets. All in, we raise our FY2023-FY2025 earnings forecasts by 2.7%-3.1%, factoring in energy prices still hovering at elevated levels in the foreseeable future due to tight power supply,” says Tan.
Tan too is upbeat on the group’s CE segment and expects “buoyant 2HFY2023 earnings”, although he does expect USEP to moderate in 2HFY2023 as fuel costs normalises.
Meanwhile, the analyst also notes that SCI has rallied 72% ytd prior to a correction due to knee-jerk reaction to plans to abort the divestment of Sembwaste and TPC measures.
“The recent share price pullback creates an opportunity for investors. We remain positive on SCI’s growth prospects, with SCI crossing $10 billion in market cap,” says Tan.
Upsides noted by the analyst include stronger-than-expected order wins from its key sectors, improved margins due to continued cost controls and economies of scale, as well as a higher dividend payout from better earnings and/or cashflow outlook.
Downsides include a sharp reduction in energy prices, slower contract wins resulting in a lower order book, unexpected margin pressure from rising raw material and labour costs and execution missteps leading to project delays or even the termination of contracts.
Citi Research analyst James Osman observes that SCI’s net debt improved to 3.3x as at end 1HFY2023 with 71% of borrowing fixed rates. The analyst attributes this to the recent China and India acquisitions, with a further scope to reduce interest costs through refinancing.
Osman is upbeat on SCI’s renewables segment, which is tracking in-line, driven by recent portfolio acquisitions. Management has also highlighted several new greenfield opportunities in China and Oman that could take SCI’s gross renewables capacity to 11.9GW as at end-1HFY2023. The analyst also notes an upcoming Investor Day on Nov 6, where he expects a refresh of strategic targets that could be a near-term share price catalyst.
“SCI looks inexpensive at around 11x FY2024 P/E vs its regional utilities peers as well as renewables stocks,” writes the analyst.
Osman also believes the group has executed well on achieving brown-to-green targets, which would “provide an opportunistic backdrop” for SCI to capture long-term business growth.
Similarly, OCBC Investment Research looks forward to the group’s updates on renewables targets to be announced on the upcoming Investor Day.
“For SCI, we would continue to monitor the group’s capital recycling efforts, such as potential partial stake sales and listing of assets in yield vehicles. This could help SCI unlock value in its current assets and grow its renewable portfolio further,” notes the analyst.
The analyst continues: “The use of third-party capital would be helpful in allowing the group to not be bogged down by an asset heavy business. The success of this strategy also has implications on whether the company may need to turn to capital raising to fund its continued transformation and next stage of growth.”
Overall, the analyst likes the stock for its efforts in pivoting in the right direction towards renewables and its ability to deliver higher ROE, which should support share price performance.
Potential catalysts noted by OCBC include accretive acquisitions in the region at reasonable valuation multiples, a further push into renewables and higher power prices.
Investment risks include macroeconomic deterioration, drag in India and the UK on asset impairments, acquisition and integration risks, as well as execution hiccups.
Lastly, CGS-CIMB research analyst Lim Siew Khee likes SCI’s prospects as the group strives towards stability.
In her report, Lim notes that the group’s CE segment, which beat her expectations in the 1HFY2023, has benefitted from a strong merchant market in Singapore, especially in the 2QFY2023. However, this may taper off by around 20% in the 2HFY2023 but mitigated by the long-term contracts with Micron and Singtel, which will kick in by then.
In addition, Lim believes that there could be more PPAs in Singapore that are under negotiation, a strategy that SCI is pursuing to ensure net profit stability.
“We believe this provides a buffer for gradual new capacity coming online by FY2025, which may lead to lower spot prices as a reference point for power prices on improving supply cushion situation,” she writes.
To this end, Lim has raised her earnings per share (EPS) estimates by 15% - 20% over FY2032 - FY2025 to factor in a higher base of profits from SCI’s CE segment.
At the same time, however, the analyst has noted the higher interest costs during the six-month period, adding that there “is room to improve cost of debt via refinancing of its China/India portfolio or freeing up project finance loans to corporate debt”.
As at 5.20pm, shares in SCI are trading at 49 cents higher or 8.751% up at $6.09 on Aug 7.
