"Amid the rise in global gas prices, we think Sembcorp is well protected," state Lim and Kande in their March 17 note.
First, Sembcorp has in place numerous multi-year power contracts, which include fixed margin and cost pass-through mechanisms, which shields it from changes in the spot prices of global energy products.
Also, besides importing gas from the Middle East, which is seeing supply constraints, Sembcorp imports natural gas via pipelines from Indonesia and Malaysia that it can use for its own power generation or for sale to others affected by limited liquified natural gas (LNG) supply following Qatar Energy’s force majeure declaration, the analysts say.
Sembcorp management, at a recent roadshow organised by CGSI, maintains that there is low risk to the imported pipeline gas supply, which the analysts figure is a higher proportion of its total gas imports.
According to the analysts, they had previously assumed a $30 million hit to Sembcorp's gas segment earnings as contracts up for renewal later this year will be at a lower spark spread.
They hold a different view now. "If global disruptions to gas supply persist, we think this impact could be mitigated through larger risk premiums in power contracts. With the changing situation, they are not including potential upside to their estimates for now.
Sembcorp was in the news late last year with the acquisition of Australian power company Alinta.
The acquisition, to be funded with debt, will likely raise the company's net debt-to-ebitda from 3.9x in FY2025 to between 4.6 and 4.7x in FY2026.
From the perspective of Lim and Kande, this heavier gearing is deemed "manageable" and Sembcorp has guided for a steady increase in its dividend payout from 44% of the earnings to between 60 and 70%.
Meanwhile, Sembcorp expects the acquisition of Alinta to help lift its earnings by $100 million in 2HFY2026 and boost its annual cash flow by over $700 million.
This deal, pending approval from Australian authorities, is expected for completion by end of June.
Lim and Kande's price target of $7.68 is based on 12x FY2027 earnings, which is a slight discount from 13x valuation multiple fetched by Sembcorp's peers.
Potential positive catalysts may be from additional long term power purchase agreements, such as Micron, which is expanding its facilities in Singapore and who is already a customer.
Another catalyst may be value-unlocking moves such as an IPO by Sembcorp of its renewable energy portfolio in India and urban solutions business in Vietnam.
On the other hand, downside risks include prolonged power plant shutdowns, and unfavourable regulatory changes impacting operations.
Sembcorp Industries shares changed hands at $6.05, up 3.42%, as at 2.17 pm. It is down 2.42% in the past year.
