After Sembcorp Industries’ 2HFY2021 core profit beat expectations, CGS-CIMB Research analysts Lim Siew Khee and Izabella Tan are “giving credit where credit is due”.
Sembcorp Industries has reported earnings of $233 million for 2HFY2021 ended December 2021, from a loss of $866 million in the year earlier period. Revenue in the same period was up 59% to $4.5 billion.
2HFY2021 core profit of $220 million was down 13% h-o-h but up 46% y-o-y, beating the CGS-CIMB analysts’ forecasts by 7%.
In a Feb 23 note, Lim and Tan are maintaining “add” on Sembcorp Industries with an unchanged target price of $2.96, which represents a 20.3% upside.
“All segments turned in stronger h-o-h earnings growth in 2HFY2021, with urban solutions delivering the highest h-o-h growth of 46% due to record land sales in China and higher land prices, and a net profit of $92 million,” write the CGS-CIMB analysts.
“Conventional energy (CE) exceeded management’s guidance of a weaker 2HFY2021, delivering a steady 2% h-o-h increase in net profit to $188 million. Strong merchant market tariffs (USEP) in Singapore and India (IEX) in 4QFY2021 resulted in a higher spark spread,” they add.
See also: Sembcorp Industries reports 2HFY2021 earnings of $233 million
“In Singapore, we believe the cogen power plant turned profitable in FY2021 from stronger ASPs and favourable operating leverage as contracts are generally on cost-plus basis. CE 2HFY2021 net profit would have been higher excluding a $30 million provision for remedial obligations in the UK,” write Lim and Tan.
Renewable plans on track
The company is in the midst of shifting its business focus to renewable energy related activities.
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2HFY2021 renewable profit of $32 million, up 33% h-o-h and up 146% y-o-y, was stronger than Lim and Tan’s $25 million forecast, mainly due to green credit from India wind, stronger margin from battery storage in UK as well as the seasonally strong winds in India.
Indeed, Sembcorp Industries’ renewable transformation is taking shape, writes DBS Group Research analyst Ho Pei Hwa. “Sembcorp Industries’ green transformation is advancing ahead of target since the announcement in May 2021. Within a year, its gross installed renewable capacity has more than doubled to 6.1GW (4.3GW attributable to Sembcorp Industries) from 2.6GW as of end-2020 and looks set to achieve its 10GW target much sooner than 2025.”
In a Feb 24 note, Ho is maintaining “buy” with a higher target price of $3.20 from $3 previously.
Sustainable solutions accounted for 35% of Sembcorp Industries’ core earnings in FY2021. Of which, the Renewable segment contributed $56 million while integrated Urban Solutions $155 million. “We expect renewable contribution to accelerate next few years as the new capacity progressively comes online,” writes Ho.
The company also declared a final dividend of 3 cents, bringing full year payout to 5 cents, translating to a dividend yield of 2.3%. “We project a similar 5-6 cents dividend next two years,” says Ho.
2022 outlook
Meanwhile, Citi Research analyst Jame Osman expects Sembcorp Industries’ near-term performance to be positively impacted by its recent renewable acquisitions in China.
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Last year, the company secured 2.9GW of new renewable energy projects across key markets.
Upon completion of the 658MW portfolio acquisition in China in the first half of 2022, gross renewables capacity installed and under development will reach 6.1GW.
“Further, the recent signings of long-term power purchase agreements (PPAs) in India’s SEIL should place the company in a better stead to eventually divest its coal plants and further its renewables pivot,” writes Osman.
“Finally, we expect the company to deploy a further $3.8 billion over 2022-25 largely toward capturing project opportunities in the region as governments look to accelerate decarbonisation and green energy efforts,” he adds.
In a Feb 23 note following the results, Osman maintained “buy” on Sembcorp Industries with a target price of $2.52, a much more conservative figure than CGS-CIMB and DBS. After a briefing with Sembcorp Industries that same day, however, Osman raised his target price to $2.80 on Feb 24.
“Management refrained from disclosing additional details following the recent long-term PPAs signed for its thermal plant P2 in India in January and February. However, it does expect P2 to turn profitable as a result (versus the past three-year average yearly loss of $47 million),” writes Osman.
“With the plants stabilised, management said that it is considering various options for these assets. We continue to believe that Sembcorp Industries could ultimately look to divest ownership of its thermal plants in the near to medium term to achieve its 2025 emission target and further its renewables pivot,” he adds.
According to Osman, Sembcorp Industries also said it “remains actively on the lookout for potential opportunities across its markets beyond China”.
Osman raised FY2022-2023F EPS forecasts by 6-7% mainly to factor in the “better-than-expected operational trends” in conventional energy and urban solutions segments.
Recommendation upgrade
PhillipCapital analyst Terence Chua has upgraded his call on Sembcorp to “accumulate” from “neutral” previously as Sembcorp’s FY2021 net profit outperformed his FY2021 estimates by 146%.
The beat came from the higher revenue from Sembcorp’s conventional energy segment, which surpassed his expectations on the back of better spark and dark spreads.
To this end, Chua has lifted his target price to $2.94 on the back of higher FY2022 PATMI estimates by 6.8%. The higher PATMI estimates come as Chua factors in higher profits from the conventional energy segment for the year.
Looking ahead, Chua says he expects Sembcorp to continue with its transition to sustainable solutions and sustainable development.
“Despite its ambitious growth plans, it will not require any equity fund-raising, relying entirely on internal sources,” he says.
For FY2022, he expects the conventional energy segment to be “supported by firmer commodity prices and energy markets”.
Best-performing counter in the STI to date
The team at OCBC Investment Research has kept its “buy” call on Sembcorp with a higher fair value estimate of $2.90 from $2.50 on the back of its strong 2HFY2021 results.
“With a turnaround due to the de-merger with Sembcorp Marine (SembMarine), Sembcorp’s key financial metrics such as return on equity (ROE) have turned for the better, but we would be even more encouraged if improvement in the future were to be driven by a sustainable fundamental pick-up in the utilities space,” writes the team.
“Successful execution of its renewables strategy provides further scope for re-rating, though good assets may not come cheap currently,” it adds.
Noting that the group is the best-performing counter on the Straits Times Index (STI) with its share price up by 28% year-to-date as at Feb 25, the team sees the group as continuing to pivot in the right direction towards renewables. Its ability to deliver higher ROE support share price performance is also a positive.
Potential catalysts, according to the OCBC team, include the accretive acquisitions in the region at “reasonable valuation multiples”.
The improvements on the ESG front with further push into renewables as well as the unlocking of value in subsidiaries and associates are also further catalysts, writes the team.
"We like Sembcorp Industries for earnings upside potential from a tight energy market," write Lock and Lim in a March 8 note on Singapore strategy.
Sembcorp Industries is riding on strong High Sulphur Fuel Oil (HSFO) prices that are benchmarked against crude oil prices, they add. "Cost plus model allows Sembcorp Industries to reap higher spark spread from natural gas fired cogeneration plants in Singapore. Persistent tight energy market could see earnings upside as we have conservatively assumed a 15% y-o-y decline in Sembcorp Industries’ conventional energy profits."
As at 10.21am, shares in Sembcorp Industries are trading 10 cents higher, or 4.08% up, at $2.55.
Photo: Sembcorp
