ANALYSTS have raised target prices for Sembcorp Industries following the group's announcement on Thursday that it would undertake a strategic transformation to focus business growth on renewable energy and sustainable urban development.

UOB Kay Hian (UOBKH) revised its target price to S$2.59, from S$2.27 previously, leaving its “Buy” call unchanged.

"While the results will take time, we view Sembcorp's move positively and it could lead to the market applying an 'ESG (environmental, social and governance) premium' to the stock," said UOBKH analyst Adrian Loh in a Friday report.

In the next four years, Sembcorp plans to grow profit contribution from its sustainable-solutions portfolio to 70 per cent from a current 40 per cent as part of its new strategic plan to "transform its portfolio from brown to green".

CGS-CIMB analyst Lim Siew Khee said in a report on Thursday, after Sembcorp’s announcement: “The focus on renewables is an attractive investment thesis for long-term investors, but execution is key.”

She said that the group’s return-on-equity goal of 10 per cent is “achievable with the help of divestment and integrated urban solutions”.

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The brokerage has also raised its target price, setting it at S$2.43, up from the previous S$1.97. It maintained its “Add” call on Sembcorp. The group is now valued in line with Asian peers, Ms Lim added.

DBS Group Research analyst Ho Pei Hwa agreed with the assessment in a report on Friday. Sembcorp is “well positioned to be a leading pan-Asian provider of sustainable solutions, particularly in South-east Asia, China and India,” she said.

“While competition might be keener in the renewable space, Sembcorp has established footprint and capabilities to grow, with cost advantage leveraging on its strength as a project developer and in-house O&M (operations and maintenance).”

DBS increased its target price to S$2.40 from S$1.85, maintaining “Buy”.

Analysts noted that Sembcorp said it would no longer invest in new coal-fired energy assets, which Mr Loh called “significant”, as it is “fundamentally changing the nature” of the group.

"The company's growth in the past decade has come from acquiring and/or developing thermal power projects both in Singapore and overseas, which resulted in a four-fold increase in its emissions intensity over the 2010-20 period," he said, acknowledging that the energy and urban solutions player also set a target to halve its greenhouse-gas emissions by 2030 and deliver net zero carbon emissions by 2050.

Analysts agree that a divestment of Sembcorp’s coal businesses could be in the group’s future, despite the management’s claims statement that it is keeping its options open. 

The carbon-emissions target implies that the company will need to significantly grow its renewables capacity, improve power-generation efficiency and fuel mix, divest its thermal coal business, or possibly a combination of all three, Mr Loh said.

Sembcorp believes that with its total addressable market, there are sufficient organic bids and partnerships for it to achieve its 10 gigawatt renewables business target without the need for mergers and acquisitions, which Mr Loh was "pleasantly surprised" about.

From now to 2025, Sembcorp's projected capital expenditure (capex) of S$5.5 billion will be spent 80/20 on renewables and urban development respectively. It said that while the number looks high, it will not stretch Sembcorp. 

Ms Lim called the S$5.5 billion investment programme target “aggressive”. The “ambitious” investment of S$4.4 billion to increase installed capacity for renewables is higher than Sembcorp’s historical utilities average capex since FY2010, she said.

Half of the capex will be project debt, and the other half will come from capital recycling, operating cash flow and/or divestments.

Sembcorp will also be able to address its funding needs through new sources of debt, as it has said that green financing, sustainability-linked financing and project financing will be the key sources of funding for its capex.

There is no “overhang of imminent equity-raising”, said Ms Ho, as Sembcorp has approximately S$5 billion of unutilised borrowing facilities as of 2020 to address refinancing needs.

Mr Loh added: "The company said that it will maintain at least S$1.5 billion in a revolving credit facility in the long term, as well as recycle capital from its mature assets (when their cash flows peak) into growth projects."

However, Ms Ho voiced some lingering concerns: “While growth is expected to be funded by debt and internal cash flow, we are wary of its high gearing and do not rule out the possibility of equity-raising further down the road.”

Keeping the current Covid-19 and economic situation in South-east Asia and India in view, DBS has trimmed FY2021 earnings forecasts.

On the other hand, UOBKH has upgraded its earnings estimates for 2021 to 2023, boosted by slightly greater confidence in Sembcorp's medium to long-term growth potential.

"We foresee an upward re-rating of the company's valuation multiples due to the scarcity value of solid ESG companies in Singapore," Mr Loh said.

CGS-CIMB is taking a wait-and-see approach, keeping its earnings per share forecast for now as it expects that the new strategy will take time to materialise.

“Assuming a blue-sky scenario, Sembcorp’s profit could reach S$397 million by FY2025,” Ms Lim said.

On Friday, shares of Sembcorp were trading at S$2.20, up S$0.05 or 2.33 per cent when market closed.