Based on Senoko’s estimated FY2024 profit, Sembcorp's $137 million implies a c.1.2x earnings, a valuation level similar to that which it paid back in November 2024 when it took a 30% stake from ENGIE for $96 million.
Senoko contributed 1.5 months or $11 million to Sembcorp's FY2024 earnings.
According to the analysts, Sembcorp might end up with just a 50% stake in Senoko with Marubeni owning the remaining for a "win-win" situation, given that the latter is still keen on a presence in Singapore's energy market.
Under a 50-50 scenario, Sembcorp's earnings will increase by 2% for the current FY2025 and for the coming FY2026. If the stake can be increased to 70%, that will lead to a 4% increase, according to Lim and Kande.
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Separately, Sembcorp has announced a 25-year renewable energy purchase agreement Meta Platforms, the parent company of Facebook.
Under the agreement, Sembcorp will build, own, and operate a 150MWp floating solar photovoltaic (PV) system on Kranji Reservoir.
Power generated from this system will be used to support Meta’s operations with renewable energy (RE) in the region, including its data centre operations in Singapore.
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"We understand that this will bring Sembcorp’s exposure to more than 30% of Singapore’s data centre capacity," the analysts add, noting that the company already runs a 60MWp PV farm in Singapore.
The analysts, calling Sembcorp a "high conviction" pick, is trading at an undemanding valuation of 9x FY2026 earnings, which is below the market average of 13x forward P/E.
The higher target price of $8.14 takes into account higher earnings, and also a 10% valuation premium over regional peers, to take into account the relatively higher 3-year CAGR earnings growth of 7%, plus ROE of 19% vs 12%.
Catalysts include stronger-than-expected earnings growth from capacity expansion, additional renewable energy contracts, recycling of mature renewable energy and non-core assets.
On the other hand, risks include unfavourable regulatory changes impacting operations and prolonged plant shutdowns.
Sembcorp Industries shares changed hands at $6.59 as at 11.21 am, up 0.15% for the day.
