“In our view, the market had likely placed high expectations for Sembcorp to deliver strong 1HFY2025 results and was worried about pockets of weaker earnings in 2HFY2025,” Loh writes in his Aug 11 report.
Loh adds that there are “many things to like” about Sembcorp’s 1HFY2025 results, such as its higher dividend, earnings growth from renewables and a full half-year of contribution from Senoko in the 2HFY2025, in addition to its “inexpensive” earnings multiples.
He also likes the group’s balance sheet, which as at end-1HFY2025 stood with a net debt of $7.38 billion and a net debt to earnings before interests, depreciation and amortisation (ebitda) ratio of 4.6 times, supported by its strong free cash flow of $1.3 billion.
Loh writes: “In our view, Sembcorp’s debt profile remains well-structured, with 81% of its debt on fixed rates and the majority of its debt maturity at over five years.”
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Performance coming out of China under Sembcorp’s renewables segment saw continued higher curtailment and impact from tariffs. On this, Loh notes that the China renewables business only accounts for 10% of total renewables earnings and therefore only has about a 1% negative impact on the group’s bottom line.
He adds: “On the positive side, profitability in this segment was higher y-o-y due to better wind resources in India and contributions from newly operational projects.
On the group’s integrated urban solutions (IUS) segment, which delivered a stable net profit of $74 million, bright spots were mainly due to higher land sales in both Vietnam and Indonesia. With two new business parks awarded in the 1HFY2025 in Vietnam, Loh notes, the business should continue to deliver growth in the medium-to-long term.
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Meanwhile, following the increase in stake of Senoko Energy for $72 million on June 13, Sembcorp has indicated that its 3 giga watt (GW) power generation portfolio in Singapore now allows it to strategically pursue additional long-term power purchase agreements.
On this, the UOBKH analyst writes: “Management also pointed out that with a fleet of baseload generation and battery capacity, any planned or unplanned shutdowns or interruptions do not expose it to the vagaries of market prices.”
In its gas and related services business, the group continues to strengthen its recurring earnings stream by signing new contracts with a 120 mega watt (MW) data centre, commercial and industrial customers with tenures ranging from five to 10 years, as well as wins valued at $650 million in new gas, power and utilities with Aster Chemicals and Energy.
Despite the bright outlook, Sembcorp’s 1HFY2025 saw negative impact from foreign exchange (forex), particularly with regards to the Singapore dollar and Indian rupee. Sembcorp has highlighted that after “Liberation Day” in the US, several currencies have weakened against the Singapore dollar by 2% to 6%, which led to a non-cash forex loss of $23 million.
Excluding this, net profit would have posted a gain of 5% y-o-y instead of the period’s decline. Loh adds: “In addition, the stronger Singapore dollar versus the Indian rupee led to a $95 million forex loss on the deferred payment note.”
With this, Loh has maintained his “add” call on the stock at a marginally lowered target price of $7.90 from $8.00 previously.
He writes: “We have lowered our FY2025 to FY2027 earnings estimates by 2% to 5% to account for margin erosion from its renewable energy imports from Malaysia, potential tariff reduction for 100MW of its renewables portfolio in Vietnam and potential risk of further curtailment in northwestern China and Guangxi.”
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His target price has a price-to-earnings ratio (P/E) multiple of 12.8 times, which is 1.5 standard deviations (s.d.) above Sembcorp’s FY2018 to FY2025 average P/E of 8.5 times which is then pegged to the average of his FY2025 and FY2026 earnings per share (EPS).
“We point out that based on FY2025 multiples, Sembcorp currently trades at a 10% discount to its Asia Pacific peers on a PE basis, and a 46% discount on enterprise value (EV)/ebitda despite delivering a forecast return on equity (ROE) of 19.2% which is over 69% higher than its peers,” writes Loh.
Share price catalysts noted by him include execution of the group’s renewables energy targets via organic and inorganic means, its delivering of a 600MW hydrogen-ready co-generation plant in Singapore on time and within budget, successful capital recycling of its energy portfolio in India and lastly, earnings-accretive mergers and acquisitions (M&A) in India and the Middle East.
Analyst Ho Pei Hwa of DBS Group Research and the team at OCBC Investment Research (OIR) have adopted a similar view. Both have maintained their “buy” calls with DBS lowering its target price to $7.40 from $8. The OCBC team has also lowered its fair value estimate to $8.02 from $8.45.
Ho writes that Sembcorp’s core profit of $491 million for the period, excluding divestment gains and forex loss was “disappointing”, falling short of her around $550 million estimate by 10%.
In India, she sees that Sembcorp has grown its renewable portfolio to a "good size” of 6.6GW capacity, to which she notes that management had emphasised that the time “looks ripe” for securitisation of India renewable assets in early 2025.
With regards to the group’s interim dividend of nine cents in the period, Ho expects Sembcorp to declare 14 cents a share as a final dividend, taking the full-year to 23 cents, which is similar to 2024, based on the around 40% payout on recurring profits.
She adds: “There might be upside of up to two cents of special dividend from the Sembwaste divestment. This translates to a decent dividend yield of about 3% to 4%. Management has expressed their commitment to ensure steady rewards to shareholders.”
The team at OIR meanwhile, believes that the forex translation impact and lower net profit from the gas and related services (GRS) segment were “key reasons” for their earnings miss.
The team writes: “While the softer GRS performance may reset near-term expectations, we appreciate Sembcorp’s earnings stability, supported by long-term contracts covering over 80% of its Singapore portfolio, healthy dividend and payout growth and strategic renewables expansion and M&A.”
On Sembcorp’s pursuit of M&A brownfield and greenfield opportunities in the Middle East, CGS International’s (CGSI) Lim Siew Khee and Meghana Kande believe that if the group succeeds, its management hopes to clinch deals that yield at least around $100 million of earnings accretion.
The analysts also expect Senoko’s full six months of earnings realisation and increased stake to contribute to a net profit of about $71 million in the second half.
With this, Lim and Kande have kept their “add” call with a lowered target price of $8.02 from $8.54 previously.
Two risks noted by the pair are unfavourable regulatory changes affecting operations and prolonged plant shutdowns.
The most bearish of the analysts is Maybank Securities’ (Maybank) Krishna Guha, who has downgraded his call on the stock to “hold” from “buy” previously, at a reduced target price of $6.40 from $7.10.
He writes in his Aug 11 report: “[We] downgrade Sembcorp to ‘hold’ as it appears fully valued, and we see downside risk to earnings.”
Guha has thus lowered his FY2025 to FY2026 core profit by around 2% to 5% accordingly, while applying a lower P/E of 12 times on his target price from 14 times previously.
“While earnings are resilient, we see downside risks from repricing of contracts in Singapore, policy or pricing changes in China or Vietnam, and tariff overhangs, which may slow down capacity expansion,” writes the Maybank analyst.
Altogether, four analysts downgraded Sembcorp following its 1HFY2025 results announcement, the others being Macquarie, Morgan Stanley and HSBC, according to Bloomberg.
As at 4.17pm, shares in Sembcorp are trading 10 cents lower or 1.57% down at $6.28.
