Sembcorp Industries – Renewable energy to drive earnings and valuation (SGX: U96)

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PSR Recommendation BUY
Status
Maintained
Target Price 5.060

  • SCI’s Singapore power capacity is nearly fully contracted till 2024. This provides visibility of earnings as Singapore accounts for more than 70% of revenue and SCI earns a spread on the sale of energy.

  • Sale of the Indian power plants will not dent profit as the earnings foregone is compensated with interest income receivable from the buyer. But it will book a non-cash accounting loss of S$81mn in FY23e on reversal of currency translation and capital reserves.

  • Renewable energy is the key growth driver, with 24% added capacity from end 2022, China re-opening and stronger energy demand in India. We maintain our BUY recommendation and raise TP to S$5.06 from S$3.68, based on 11x PE for FY24e.

 

Highlights

  • Singapore power capacity is nearly fully contracted till 2024, with the latest 18-year power purchase agreement signed with a unit of Micron Technology, Inc. for up to 450MW. Though the Uniform Singapore Energy Price (USEP) has eased by 10.5% in Jan-Mar 23 compared with FY22, margins should be maintained as it works on a cost-plus model.

  • Energy Market Authority is calling for proposals in 2H23 to add electricity generation capacity by 2028. Peak electricity demand is projected to rise at a CAGR of 4-6% to reach between 10.1GW and 11.7GW by 2028, from 7.8GW currently. We believe this lowers reserve margin from current 34% to less than 15%. To ride on the growth in energy demand, SCI has commissioned the construction of its fourth hydrogen-ready 600MW combined cycle power plant, which would be operational by 2026.

  • Sale of Indian power plants for S$2bn at end Feb 2023 will not dent net profit. SCI extended a 15-year extendable loan to the buyer at an interest rate of about 9%. We estimate interest income of about S$132mn, which would offset net earnings loss of S$144mn from these assets. SCI will, however, book a non-cash accounting loss of S$81mn in FY23e from the reversal of currency translation and capital reserves.

  • Renewable energy segment will be the growth engine, led by 1) uplift in energy demand with China’s re-opening. China accounts for 53% of its gross installed capacity; 2) India’s growing share of global manufacturing output as manufacturers set up China+ manufacturing base to diversify risks; and 3) SCI has added renewable energy assets, mainly through joint ventures that do not strain its balance sheet. Total gross installed capacity has increased by 24% since end-2022 to reach 10.3 GW. We estimate an ROE of 8-10% on these assets. But ROE from future acquisitions could decline, due to 1) higher interest costs; 2) intense competition for these assets; and 3) softer macro environment that affect tariffs.

  • Land sales to be ramped up to 500 ha in 2025, underpinned by a strong orderbook of 312 ha and landbank of 2,743 ha, which are mainly in Vietnam. These would bring net gearing down to 0.96x at end-2024.

Maintain BUY and raised TP to S$5.06

We maintain our BUY call and raise TP to S$5.06, based on 11x PE for FY24e.

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