DBS Group Research analyst Ho Pei Hwa has maintained a ‘buy’ rating on Sembcorp Industries (Sembcorp) with an increased target price to $3 from $2.40, based on a higher price-to-book value (P/BV) multiple of 1.4 times (from 1.2 times previously). The higher target price is also based on a rolled over valuation to FY2022 (from blended FY2021/2022), against 9-10% normalised return on equity (ROE).
“Successful execution of [Sembcorp’s] renewable energy plan, translating into earnings growth, would further lift valuations, writes Ho in his Feb 15 report.
In May 2021, Sembcorp unveiled its strategy to transform its portfolio from brown to green, by focusing on growing renewables and integrated urban solutions businesses. It set quantitative targets to quadruple its renewable portfolio to 10GW by 2025, from 2.6GW of wind and solar capacity in Southeast Asia, India, and China as of end-2020, according to Ho.
“This would lift renewables as a percentage of total energy capacity from 20% to 50%,” explains Ho. “Coupled with the urban business, sustainability solutions are expected to contribute 70% of group earnings by 2025.”
As such, the continuous progress of renewable strategy warrants further re-rating, says Ho. Decarbonisation initiatives such as divestment of coal-fired power plants in China and India could also provide another catalyst.
Meanwhile, improving supply and demand fundamentals of the power market in Singapore and India prompts potential earnings upgrades in the upcoming results.
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“We are positive on Sembcorp’s longer-term prospects as its growing renewable portfolio should continue to drive its valuation re-rating. Growth is expected to be funded by debt and internal cash flow,” says Ho.
Some key risks to earnings that the analyst considers include deterioration of Singapore's power spark spreads and execution hiccups of its renewable plans.
As at 11.56am, shares in Sembcorp are trading 3 cents lower or 1.16% down at $2.55.
Photo: Sembcorp
