Brokers’ take: Analysts lift Sembcorp targets on higher growth expectations
Michelle Zhu
SEVERAL brokerages have upped their near-term earnings projections for Sembcorp Industries to result in higher price targets.
This comes after the group’s net profit for FY2022 trebled year on year due to strong contributions from its conventional energy (CE) business, while its renewable energy (RE) segment continued to expand.
UOB Kay Hian’s (UOBKH) new target price of S$4.57 compared with S$4.10 previously results from an upgrade of earnings projections by 21 per cent for FY2023, and 17 per cent for FY2024.
Earlier estimates for these financial periods were “admittedly very conservative”, said analyst Adrian Loh in a note on Wednesday (Feb 22), as he believed the higher-than-normal CE earnings in prior years could not be sustained.
Loh now thinks the high margins generated in this segment will “remain for a while longer” given the current market conditions.
Sembcorp remains inexpensive, in his view, as it continues to trade at a discount to its global utilities peers’ average.
Maybank Securities’ price target on the stock was lifted to S$4.35 from S$4 after the research house raised FY2023 to FY2025 net profit forecasts by 5 to 11 per cent, respectively.
Analyst Kelvin Tan said he expects higher contributions from the CE segment due to locked-in power spreads.
A stronger top-line performance is also anticipated from the RE segment from acquisitions, as well as interest payments from the recent divestment of Sembcorp Energy India Limited (SEIL).
Noting that Sembcorp’s sustainable solutions have expanded by a compound annual growth rate of 35 per cent over the past two years, Tan thinks this could potentially accelerate to grow over 40 per cent in FY2023 to reflect full-year contributions from the group’s renewable energy acquisitions in FY2022.
“With the bulk of (Sembcorp’s) portfolio on long-term contracts, we remain optimistic on its growth prospects and are not overly concerned as earnings taper off from a record high in FY2022,” he added.
Meanwhile, DBS Group Research has lifted its price target on the stock slightly to S$4.60 from S$4.50 after revising its FY2023 earnings forecast upwards by 2 per cent.
The research house’s marginally-higher top-line projections come in anticipation of stronger Singapore earnings due to fixed contracts, to be partially offset by an expected loss from the SEIL divestment.
While CGS-CIMB’s price target is unchanged at S$5.12, the research house has raised its core earnings per share (EPS) estimates by 2 per cent for FY2023 on expectations of sustained strength in CE power prices, on top of the opportunity for fuel source optimisation.
The research house, however, cut its reported FY2023 EPS estimate by 8 per cent to reflect an exceptional item loss which Sembcorp’s management expects to report in FY2023 for SEIL.
Though earnings estimates for FY2024 remain unchanged, CGS-CIMB analysts have assumed a lower Ebitda (earnings before interest, taxes, depreciation and amortisation) margin for the CE segment at 13 per cent in FY2024, versus FY2022’s margin of 14 per cent.
UOBKH, Maybank and DBS continue to rate Sembcorp at “buy”, while CGS-CIMB maintains its “add” call on the stock.
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