CGS-CIMB Research, DBS Group Research and UOB Kay Hian all raised their target prices for the stock after Sembcorp unveiled its strategic plan to transform its portfolio from brown to green at its investor day on May 27.
See: Sembcorp Industries aims for 70% profit contribution from sustainable projects by 2025, net zero emissions by 2050
CGS-CIMB analyst Lim Siew Khee says that Sembcorp’s focus on renewables is an attractive thesis for long-term investors, though execution will be key.
She also highlights that Sembcorp’s plan to quadruple its renewable energy capacity to 10GW by 2025 is more aggressive than the 5GW target set by the Ayala-led AC Energy Philippines (ACEN), though she notes that ACEN is working towards a 12GW target in the long-run.
“Given ACEN’s renewable growth profile, we believe investors are likely to gradually benchmark Sembcorp to the former, given the similar profile of assets,” she says.
While Lim has kept her EPS forecasts for Sembcorp unchanged, she now values the group using a P/E of 15 times, pegged to regional utility players. To that end, her target price has increased from $1.97 to $2.43, with her rating maintained at ‘add’.
“Assuming Sembcorp achieves its 10%/30% CAGR targets for integrated urban solutions/renewables, its net profit could reach $397m by FY2025 [ending December] in a blue-sky scenario and yield a long-term TP of$3.33 (based on 15 times P/E),” she adds.
UOB Kay Hian’s Adrian Loh says the portfolio transition could lead to the market applying an “ESG premium” on the stock. “We foresee an upward re-rating of the company’s valuation multiples due to the scarcity value of solid ESG companies in Singapore,” he says.
He has maintained his ‘buy’ rating for Sembcorp with a higher target price of $2.59 from $2.27 previously following a rollover of his valuation year to 2022 as well as an increased P/B to 1.2
Given Sembcorp’s net zero emissions target by 2050, Loh believes that thermal energy divestments may be on the horizon. “While Sembcorp has stated that it is keeping its options open, we believe that longer term, the company has to divest its coal business (or about 42% of its total 9,400MW of thermal power),” he notes.
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He also flagged that a previously considered IPO of Sembcorp’s Indian business, which includes renewable and thermal assets, is now likely off the table.
Meanwhile, DBS analyst Ho Pei Hwa highlighted that out of Sembcorp’s $5.5 billion capex budget for 2021-2025, 80% will be channelled to renewable portfolio, with half to be funded by debt (in particular, green financing) and the remainder by operating cash flow and divestments.
“While growth is expected to be funded by debt and internal cash flow, we are wary of its high gearing and do not rule out the possibility of equity-raising further down the road,” she says.
Nonetheless, she believes Sembcorp should continue to see re-rating as it embarks on its green transformation strategy. "We lift our TP to $2.40, based on a higher P/BV multiple of 1.2x, and reiterate our 'buy' call," she says.
As at 4.57pm, shares in Sembcorp are up 5 cents or 2.33% at $2.20.
