Citi Research analyst Jame Osman is keeping his “buy” call on Sembcorp Industries U96 with a higher target price of $5.98 from $4.36 previously, as he sees further re-rating potential ahead despite the stellar growth in the company’s share price.
As at Osman’s report on May 26, shares in Sembcorp had grown by over 40% to $4.90, and there’s still room to grow, notes the analyst.
The way Osman sees it, Sembcorp’s strong conventional energy segment performance as well as its further asset recycling efforts to convert more of the company’s portfolio to renewables, are positive catalysts for Sembcorp’s share price.
In conventional energy, the average monthly Uniform Singapore Energy Price (USEP) rates in Singapore have remained “persistently high” in 2023 even though gas prices have moderated. “We expect [the higher USEP rates] will support Sembcorp’s conventional energy segment performance, given market expectations for a normalisation in FY2023 earnings due to lower tariffs,” says Osman.
He adds that management is “sanguine” that the continued growth in demand in Singapore, along with tighter capacity, should “spark spreads into the medium-term”.
“To strengthen its long-term earnings visibility, management aims to contract two-thirds of its capacity (with 50% on long-term power purchase agreements or PPAs; remaining on short-term of one to three years), leaving the remaining one-third exposed to spot market as backup,” he notes.
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Sembcorp had recently signed long-term PPAs with its customers including Micron and Singapore Telecommunications (Singtel) in February and May respectively.
On Sembcorp’s asset recycling strategy, the analyst expects the company’s management to provide further clarity on its targets during its investor day session, which will be held in the second half of 2023.
The added clarity will serve as a near-term catalyst, says Osman.
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In addition to his increased target price, Osman has raised his earnings for the FY2024 by 4% to reflect stronger profitability from Sembcorp’s conventional energy segment. That said, he has lowered his earnings targets for the FY2023 by 6% to factor in the one-off $81 million adjustment due to the revaluation of the divestment of Sembcorp Energy India Limited (SEIL).
The raised target price came about after a rollover of the analyst’s ebitda base to FY2023 to FY2024 from FY2023. A higher target ev/ebitda multiple of 9x (from 8x previously) to Sembcorp’s energy business was also applied to reflect the solid execution of its green transition strategy.
“Sembcorp has observed 48%/35% upward revisions to FY2023/FY2024 consensus earnings per share (EPS) forecasts over the past year, but appears inexpensive at 10x FY2023 P/E ratio versus [its] regional utility peers as well as renewables stocks,” writes Osman.
“We believe decarbonisation initiatives regionally and domestically provide an opportunistic backdrop for Sembcorp to capture long-term business growth,” he adds.
Shares in Sembcorp closed 1 cent lower or 0.2% down at $5.01 on May 30.
