Sembcorp Industries

Renewable energy as growth engine

Renewable energy will be a growth engine for Sembcorp Industries, with stable earnings visibility coming from its Singapore power capacity, which is nearly fully contracted till 2024, says PhillipCapital Research analyst Peggy Mak.

Sembcorp should see an uplift in energy demand with China’s reopening, adds Mak in an April 15 note, as China accounts for 53% of its gross installed capacity.

In addition, India’s growing share of global manufacturing output is another tailwind, as manufacturers set up “China+” manufacturing bases to diversify risks, says Mak.

Finally. Sembcorp has added renewable energy assets, mainly through joint ventures that do not strain its balance sheet. Total gross installed and under development capacity has increased by 24% since end-2022 to reach 10.3 gigawatts (GW), surpassing its target of 10GW in installed renewable energy capacity by 2025.

Mak estimates an ROE of 8%–10% on these assets but ROE from future acquisitions could decline due to higher interest costs, intense competition for these assets and a softer macro environment that will affect tariffs.

Mak is maintaining a “buy” on Sembcorp, with a higher target price of $5.06 from $3.68 previously. Mak’s latest target price represents an upside of 20.2% against a last traded price of $4.30 on April 14.

Sembcorp’s Singapore power capacity is nearly fully contracted till 2024, with the latest 18-year power purchase agreement signed with a unit of Micron Technology for up to 450 megawatts (MW).

Singapore accounts for more than 70% of revenue and Sembcorp earns a spread on the sale of energy, writes Mak.

Though the Uniform Singapore Energy Price (USEP) has eased by 10.5% in January to March compared with FY2022 ended December 2022, margins should be maintained as it works on a cost-plus model, says Mak.

The Energy Market Authority (EMA) is calling for proposals in 2H2023 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, up from 7.8GW currently. “We believe this lowers reserve margin from the current 34% to less than 15%,” says Mak.

To ride on the growth in energy demand, Sembcorp has commissioned the construction of its fourth hydrogen-ready 600 MW combined cycle power plant, which will be operational by 2026.

Meanwhile, Mak notes that Sembcorp’s sale of its Indian power plants for $2 billion at end-February 2023 will not dent its net profit. “Sembcorp extended a 15-year extendable loan to the buyer at an interest rate of about 9%. We estimate interest income of about $132 million, which would offset net earnings loss of $144 million from these assets.”

Sembcorp will, however, book a non-cash accounting loss of $81 million in FY2024 from the reversal of currency translation and capital reserves.

Meanwhile, Sembcorp’s land sales will be ramped up to 500 ha in 2025, underpinned by a strong order book of 312 ha and landbank of 2,743 ha, which are mainly in Vietnam. These would bring net gearing down to 0.96x at end2024, according to Mak.

On Feb 21, the company reported earnings of $848 million for FY2022, up 204% over FY2021’s $279 million. Revenue was up 21% to $9.4 billion, with growth from both its conventional and renewable energy segments.

Sembcorp plans to pay a final dividend of four cents, and a special dividend of the same amount. This will bring the total payout for FY2022 to 12 cents.

Sembcorp has also been active in share buybacks. On March 1, it acquired 808,700 shares at $3.67 each on the open market. In subsequent buybacks, Sembcorp acquired its own shares at steadily higher prices, reaching $4.09 on March 21, when it acquired 784,500 shares.

On March 22, the company acquired 1.25 million shares at $4.13 each, bringing the total number of shares bought back under the current mandate to 15.36 million, equal to 0.861% of the total share base.

As of March 31, Sembcorp had bought back 0.86% of its issued shares (excluding treasury shares) as of the date of the buyback resolution, which was April 21, 2022.

In fact, Oversea-Chinese Banking Corporation (OCBC) and Sembcorp filed the highest buyback considerations on the Singapore Exchange in 1Q2023. During the quarter, Sembcorp bought back 6,415,500 shares at an average price of $3.99, including stamp duties and clearing charges paid or payable for the shares. —