Citi Research analyst Luis Hilado has kept his “buy” call on Sembcorp Industries even though the group is likely to miss its 70% profit contribution target from its renewables business by FY2025. Sembcorp first mentioned these targets at its investor day for FY2021. Broadsheet The Business Times said that Sembcorp confirmed the missed target in its Feb 3 report.
However, Hilado remains unfazed as Sembcorp had already flagged the likelihood of this happening at its FY2023 investor day. The missed target is also due to Sembcorp’s strong gas segment due to pricing and likely boosted by the acquisition of Senoko Energy. On Sept 17, 2024, Sembcorp announced that it had signed a sale and purchase agreement (SPA) to acquire a 30% stake in Senoko Energy. The acquisition, which was revealed to cost Sembcorp $96 million, was completed in November 2024.
“Given that management’s FY2028 targets are also based on total shareholder returns (TSR), environmental, social and governance (ESG) and that [the group’s] financials target encompasses total profitability and no longer segmental profit breakdown, we do not view the news as unexpected and/or concerning,” Hilado writes in his Feb 3 report.
He adds that healthy growth in earnings from Sembcorp’s recurring sources as well as a continued commitment to raising renewables gross capacity to 25GW by FY2028 should see management’s three goals that its incentives are now based on.
Hilado has kept his target price unchanged at $6.68, which is based on a sum-of-the-parts (SOTP) valuation methodology due to the group’s different operating segments.
He has valued the energy business (conventional and renewables) at 9 times Sembcorp’s FY2025 ebitda, which is roughly in line with its peers. This reflects the “solid execution of its green transition strategy and more stable earnings base from its conventional energy segment”. Hilado has valued Sembcorp’s integrated urban solutions business at 0.7 times P/B, which is benchmarked against the large-cap Singapore developers.
Sembcorp will release its results for the FY2024 ended Dec 31, 2024, before trading hours on Feb 27.
Shares in Sembcorp closed 8 cents lower or 1.43% down at $5.50 on Feb 3.
