For one, in India, solar plant load factors declined in the first four months of the year, likely due to low resource availability and ongoing capacity additions. On the other hand, China continued to see elevated renewable energy curtailment.
For context, China and India accounted for 47% and 38% of Sembcorp’s 20.3GW RE portfolio at end-FY2025, respectively, of which around 4.2GW is scheduled to come online over FY2027 to FY2028.
"We believe the combination of these factors, along with Sembcorp's limited planned renewable energy capacity additions in 1HFY2026, likely led to weaker profitability for its renewable energy segment," state Lim and Kande, who have projected a 55% y-o-y drop in renewable energy earnings 1HFY2026 to $59 million.
Also, with weaker operations in UK and lower spark spreads in Singapore, Sembcorp's earnings from gas and related services will likely drop 17% y-o-y to $275 million.
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For now, with the company's 600MW Sakra plant commencing operations in 4QFY2026, Lim and Kande are "still comfortable" with their FY2026 earnings forecast of $645 million for this segment, down 8.% y-o-y.
All in, they have cut their FY2026 earnings by 6.5% and for the subsequent FY2027 and FY2028's by 7% and 4% respectively, to reflect a more cautious outlook for renewable energy.
By applying the same 12x FY2027 earnings valuation, they have derived a lower target price of $7.15, which is a discount to 16x fetched by faster growing peers.
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Given the headwinds from renewable energy, the CGSI analysts have removed Sembcorp from their top picks list of Singapore stocks.
Nonetheless, they have maintained "add" as there are several key re-rating catalysts.
The first of which is value-unlocking from Sembcorp’s India renewal energy business IPO. This corporate action could materialise earlier than expected in late this current FY2026 to early FY2027, thanks to improving valuations of Indian peers who are trading at 12x FYFY2026 EV/EBITDA vs. Sembcorp’s 10x.
Also, Sembcorp may see another catalyst from stronger-than-expected earnings contribution from Sakra plant and new power purchase agreements.
Lim and Kande suggest that Sembcorp could be a strong contender for incremental contracts from Micron, which is in the midst of a $30 billion capacity expansion here in Singapore.
On the other hand, downside risks include prolonged power plant shutdowns, and unfavourable regulatory changes impacting operations.
Sembcorp Industries shares as at 10.33 am, was down 3.01% to trade at $5.80.
