PhillipCapital’s senior research analyst Terence Chua has downgraded his recommendation on Sembcorp Industries (Sembcorp) to “neutral” from “accumulate” after the recent run-up in its share price.
Shares in Sembcorp crossed the $3 mark on July 20, which marked a 52-week high.
Despite the downgrade, Chua has raised his target price on the counter to $2.96 from $2.94 previously. His new target price is still based on an FY2022 P/BV of 1.2x, which is the average of its peers.
Chua has also lifted his Patmi estimates for the FY2022 by 6% as he factors in higher profits from Sembcorp’s conventional energy and renewable energy segments for the FY2022 ending Dec 31.
Sembcorp, on July 19, said that it was expecting its financial results for the 1HFY2022 to be “materially higher”, due to the conventional energy segment.
In his report dated July 21, Chua notes three positives to Sembcorp’s outlook.
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First, the average Uniform Singapore Energy Price (USEP), which rose 239% y-o-y or 9.8% h-o-h in the 1HFY2022 driven by the conflict in Ukraine, will lift Sembcorp’s conventional energy segment in the 1HFY2022.
As it is, the global energy crunch since September 2021 lifted Sembcorp’s conventional energy segment in the 2HFY2021. The conflict in Ukraine at the beginning of 2022 “further exacerbated” the risk of disruptions in oil and gas, he adds.
Average USEPs for the 1HFY2022 surged to $324/MWh, higher than the $295/MWh average in 2HFY2021.
“Spark spreads have increased to 6.3 year-to-date (ytd) as average USEP prices have moved ahead of high sulphur fuel oil (HSFO) in the last nine months,” Chua writes.
Next, tariffs for power in India’s Tamil Nadu and Gujarat rose some 88% y-o-y in the 1HFY2022, driven by high global oil prices and higher temperatures in the country.
The International Energy Agency (IEA) has also recently revised upward India’s electricity demand to 7% from negative previously in light of the intense heatwave in the country, says Chua.
As such, the analyst has raised his FY2022 revenue estimates for Sembcorp’s conventional energy segment to $8.8 billion from $8.6 billion to account for better spark spreads for Sembcorp Cogen and India.
Third, Sembcorp, which is on track to building up its green energy portfolio, is seen as an important re-rating driver for Chua.
“Sembcorp’s gross renewables capacity in operation and under development globally now stands at 6.8GW in 1HFY2022 from 6.1GW as at end-2021. This is ahead of our FY2022 target of 7.3GW,” says the analyst.
“Accordingly, we revise our FY22e gross renewables capacity to 7.6GW on account of the group’s aggressive build-up of its renewables portfolio,” he adds. “We believe the company is on track to achieve its plans of increasing its renewable capacity to 10GW by 2025.”
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On the other hand, negatives to the counter include headwinds in China’s property market, which has “weakened sharply” in the past year.
The weakening of China’s property market was due to the government’s clampdown on excessive borrowings by developers and the Covid-19-induced economic slowdown.
“We believe this will hurt the group’s land sales in China, though the impact is not expected to be significant as China accounts for just 6% of the group’s total saleable land,” Chua writes.
As at 4.02pm, shares in Sembcorp are trading flat at $2.99.
