DBS Group Research analyst Ho Pei Hwa is convinced that Sembcorp Industries U96 is able to sustain its higher power prices. With that, Ho has raised FY2023 and FY2024 (final year end in December) earnings estimate by 13% - 14%. Based on higher target valuation multiple of 15x on the revised FY2023 earnings, Ho has increased her target price on Sembcorp to $6.50 from $4.60 previously.
The new target price is in line with regional peers’ average and implies a 26% upside potential. However, its target price of $6.50 could be a tough reach as this is close to the counter’s all-time high, which it achieved in October 2007.
On June 20, shares in Sembcorp corrected some 9% following the Temporary Price Cap (TPC) news on 20 June.
“This seems overdone, in our view, considering the relatively limited impact from TPCs, and still constructive power market dynamics in Singapore,” says Ho.
Ho has reiterated her “buy” call on the stock.
The way Ho sees it, she likes Sembcorp for its position as a leading Pan-Asian provider of sustainable solutions, particularly in Southeast Asia, China, and India. She sees the counter as “the best renewable proxy listed on the SGX”.
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With the impeccable execution of its “brown-to-green” transformation strategy in mid-2021, Sembcorp has accomplished its key targets way ahead of 2025. It has quadrupled its renewable portfolio in 1.5 years to reach its target of about 10GW, representing approximately 60% of its total power portfolio.
On that note, the group’s renewable portfolio remain on growth track.
The market is looking forward to the group’s new target for its renewable portfolio. While its gearing level is relatively high, the group has the flexibility to recycle capital, such as securitising mature, stable cash flow-generating assets.
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“Hence, we remain optimistic on Sembcorp’s growth prospects ahead and are not overly concerned with earnings tapering off from the record high in FY2022, which was led by unprecedentedly high tariffs and profitability for conventional energy,” says Ho.
Sustainable solutions have grown steadily at a about 24% CAGR over the past two years and Ho believes that it could potentially accelerate to over 40% y-o-y growth in FY2023, with the maiden full-year contribution from the renewable energy acquisitions in FY2022.
“A growing renewable energy portfolio with accretive acquisitions remains the key share price driver for Sembcorp in the current phase,” says Ho, adding that smooth integration and delivery of an earnings increase from these renewable energy portfolios are also critical to strengthen investor confidence in its asset quality and management’s execution. Efficient capital recycling to free up cash for renewable investment would also cheer up the market.
Overall, the analyst believes that 40% of the rerating on Sembcorp could come from the around 39% CAGR in renewable profit and 60% from an uplift in the target valuation multiple from 12x to 15x P/E, on the back of accretive renewable acquisitions, as well as efficient capital recycling to fund future growth and enhance shareholder return.
As at 3.20pm on June 21, shares in Sembcorp are trading 4.5% higher at $5.38.
