UOB Kay Hian analyst Adrian Loh is keeping his “buy” call on Sembcorp Industries (Sembcorp) as it has been actively making deals focused on expanding its renewables footprint.
In his report dated April 18, Loh is very much positive on Sembcorp, calling the counter a “key blue-chip holding in any Singapore portfolio” and raising its target price to $3.59 from $2.95 previously.
The new target price is based on a target P/E of 13.6x and is 1 standard deviation above Sembcorp’s past five-year average P/E of 11.2x (excluding 2020 where the company reported impairment-related losses).
“We have elected to change our target price methodology from the previous P/B multiple bases to using a target PE multiple as we believe using the latter more fairly and accurately reflects the company’s forward valuations given that we have moved past the peak of the Covid-19 pandemic,” says Loh.
Since the company announced its intent to move from brown to green energy, Sembcorp has signed over $1 billion worth of deals in China alone.
“Apart from China, the company has also signed up to another six renewables deals in Asia as well as in the UK, with likely more to come,” says Loh.
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“We believe the company will remain busy with more renewables deals for the remainder of 2022,” he adds.
Sembcorp is also “well on target” to build up its green energy portfolio to 10GW by 2025. The company has built up its renewables portfolio from a gross installed capacity of 2.6GW at the beginning of 2021 to a present capacity of 5.3GW. The capacity excludes another 1.1GW that is currently under development, notes Loh.
“In October 2021 and April 2022, Sembcorp raised a total of S975 million in sustainability-linked notes, all of which were well subscribed and thus underlining the market’s confidence in the company’s strategy,” says the analyst.
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Meanwhile, Sembcorp’s conventional power assets are giving the company “solid returns” at present. While it may not be great for the company’s environmental, social and governance (ESG) score, conventional energy is expected to have an outsized contribution in 1QFY2022 and 1HFY2022 due to the current high electricity prices in India and Singapore.
In India, the company has long-term power purchase agreements (PPA) in place and is unlikely to face regulatory risk of having lower power prices unilaterally imposed on them, says Loh.
The company’s business in India, Sembcorp Energy India Limited (SEIL) is also “becoming less of a headache” as 85% of its 2.6GW capacity will be under mid- or long-term contracts following the signing two long-term supply contracts for 825MW from its P2 plant in January and February this year.
“This puts Sembcorp’s India business in a stronger position financially in FY2022, and more importantly has made its India thermal portfolio more attractive to potential acquirers. Going forward, the company has stated that it will look to sign more PPAs to ensure 100% coverage for its P2 asset,” Loh writes.
“A key aspect to look out for in Sembcorp’s results going forward is the return on equity (ROE) for its renewables business. Its 2021 results show an ROE of 4.6%. However, this is expected to increase as these assets mature,” the analyst says.
“Currently, with an average age of 4-5 years for its renewables assets, an ROE of around 5-7% is to be expected. However as assets mature and earnings and cashflow contribution increases, coupled with the paying down of project debt, ROE is expected to trend up to 10% and head northwards to 20% as they get older,” he adds.
To this end, the analyst has upgraded his earnings estimates by 6% to 11% for FY2022 to FY2024.
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The higher estimates will take into account a “better-than-expected contribution from the Singapore power market and a turnaround to profitability at its Indian power business in 2022,” he says.
On both P/E and P/B bases, Sembcorp is currently trading at a discount to its utilities peers in developed Asia.
“The valuation gap between Sembcorp and its emerging Asian peers is slightly larger at as its comparable companies trade at average FY2022 P/E and P/B of 16.8x and 1.5x respectively,” says Loh
“We continue to foresee an upward re-rating of Sembcorp’s valuation multiples due to the scarcity value of solid ESG companies in Singapore. We also highlight that listed renewables companies trade at 3x-4x P/B, which are at a substantial premium to Sembcorp,” he adds.
The sustained economic recovery post-Covid-19, which leads to the increased use of energy and utilities will be a catalyst to Sembcorp’s share price, says the analyst.
Shares in Sembcorp closed 2 cents higher or 0.7% up at $2.88 on April 18, or an FY2022 P/B of 1.2x and a dividend yield of 2.7%.
