SINGAPORE (Mar 22): OCBC Research is maintaining its “buy” call on Sembcorp Industries (SCI) with a fair value of $3.59 despite further liberalisation of Singapore’s retail electricity market which brings higher competition along with it.
In a Thursday report, lead analyst Low Pei Han says that while there is a possibility of “irrational competition” in the initial phase of energy market liberalisation, as well as pressure on SCI’s margins due to the resultant need for promotional spending, the Singapore retail electricity business is but a segment of the group’s diverse portfolio.
However, Sembcorp Power, the group’s utilities arm, reported an annual net profit of $3.4-4.4 million between 2014 and 2016, which she deems marginal compared to SCI’s total net profit over recent years.
Sembcorp Power comprises three business lines spanning sectors and geographies. This includes the supply of natural gas from Indonesia under its Gas and Power segment, and the provision of water & wastewater treatment under Renewables & Environment.
To recap, the Electricity Market Authority (EMA) is due to soft launch its Open Electricity Market initiative in Jurong on April 1, allowing residential and small business consumers with postal codes 60 to 64 to buy electricity from their retailer of choice.
Merchant & Retail is most likely to be affected by the liberalisation of Singapore’s energy market as SCI retails electricity to contestable customers – a pool which will increase as more of the non-contestable segment becomes contestable – although the industry will become more competitive with the entrance of more retailers, says Low.
“Meanwhile, we look forward to the growth of the LNG power business for SCI, as well as renewables for the longer term. The group has a global scalable operating model, and is well-positioned to implement its new strategy to achieve double-digit ROE in five years,” concludes Low.
As at 10.09am, shares in SCI are trading 3 cents higher at $3.10 or 13.6 times FY18 earnings.
