OCBC Investment Research has maintained its "buy" call on Sembcorp Industries U96 , given its well-received and ongoing strategy of focusing more on renewable energy assets.
However, following some fine-tuning of its valuation, OCBC has trimmed its target price from $7.11 to $6.83.
In its Dec 6 note, OCBC says that Sembcorp's key financial metrics such as ROE have turned for the better, a trend supported by higher electricity prices as well.
It has also been divesting non-core assets to unlock value and grow its renewables portfolio.
"Successful execution of its renewables strategy provides further scope for re-rating, though good assets may not come cheap currently," says OCBC.
Sembcorp has been actively acquiring renewable assets. The more recent ones include the proposal to buy 245 MW of operational renewable wind, solar and hydropower assets in Vietnam, bringing total capacity to over 450 MW.
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Sembcorp has also two separate agreements to acquire a total of 428 MW of wind assets in China and India, including 100% of Qinzhou Yuanneng Wind Power for $130 million, and two special purpose vehicles for $70 million.
Upon completion of these deals, Sembcorp's total gross renewable capacity will reach 12.6 GW in total.
As part of its 'brown' to 'green' move, Sembcorp recently raised its renewables capacity target to 25GW by 2028, more than double its earlier 10GW target by 2025.
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In the meantime, it will tap on its existing gas business as a "transition fuel" to fund its renewables growth.
From the perspective of OCBC, what is of interest is also the company's capital recycling efforts, such as potential partial stake sales and listing of assets in yield vehicles.
According to OCBC, Sembcorp has indicated plans to invest $14 billion over 2024-2028 and fund half of this growth via operating cash flow, a fifth by capital recycling and partnerships, and a third by balance sheet leverage.
"The success of this strategy has implications on whether the company may need to turn to capital raising to fund its continued transformation and next stage of growth," says OCBC.
