DBS Group Research analyst Ho Pei Hwa is keeping her “buy” call on Sembcorp Industries (Sembcorp) at a raised target price (TP) of $7.38 from $7.35 previously.
She writes in her Feb 20 report: “A leading energy transition player in Asia- particularly India, China, and Southeast Asia. Sembcorp Industries is uniquely positioned in the energy transition drive, with a full suite of competitive and green energy solutions.”
Ho notes that the group is set to deliver promising earnings compound annual growth rate (CAGR) of above 10% through FY2028 as its three key business segments enter expansion mode.
“Renewable segment could see profit rising by above 20% CAGR, backed by its existing project pipeline that is set to increase attributable installed capacity by around 50% over the next two to three years.”
She adds: “After quadrupling its installed renewable capacity in three years to around 10 gigawatt (GW) by end-2023, Sembcorp now aims to raise its capacity 2.5-fold to around 25GW by FY2028, representing over 80% of its total power portfolio.”
Sembcorp’s gas-related services could also see earnings growth with Senoko’s contribution and a healthy Singapore power market. Meanwhile, its integrated urban solutions could also see an uptick, leveraging growth in industrials and China plus one in the Asean region.
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On the group’s financials, Ho writes that although its gearing level is relatively high, Sembcorp has strong operating cash flow, good access to project financing for renewable projects, as well as the flexibility to recycle capital through the securitisation of assets and partnerships.
“These allow it to continue self-funding its five-year growth plan without the need for equity fundraising (EFR).”
The group’s management is also committed to rewarding shareholders with dividends, paying out at least 20% of earnings as ordinary dividends plus special dividends. On this, Ho writes: “Upside to current expectation of around 25% payout ratio, or 2.5% to 3.0% could cheer the market.”
Overall, Ho’s higher TP is based on 12 times FY2025 price-to-equity ratio (P/E), which implies a 33% upside. “We believe 40% of the re-rating could come from the around 25% six-year CAGR in renewable profit and 60% from an uplift in the valuation multiple from 9 times P/E to 12 times P/E, on the back of accretive acquisitions and steady earnings delivery.”
Key risks noted to earnings by the analyst include execution hiccups in the company’s renewable energy plans, in particular, keener competition for China renewables.
As at 2.28 pm, shares in Sembcorp are trading 9 cents higher or 1.57% up at $5.84.
