Brokers' take: Analysts raise Sembcorp targets on strong FY21 results, solid outlook

SEVERAL brokerages have reiterated their "buy" or "add" calls following Sembcorp Industries' U96 earnings for the financial year ended Dec 31, 2021, which saw the group report a net profit of S$279 million for the full year.

DBS Group Research and UOB Kay Hian (UOBKH) on Thursday (Feb 24) increased their target prices to S$3.20 and S$2.95 respectively, highlighting key positives such as higher core return on equity (ROE), a strong conventional energy segment and a growing renewable energy portfolio.

In particular, DBS analyst Ho Pei Hwa is positive on the energy and urban development company's longer-term prospects, as its renewable-energy transformation begins to take shape, with more renewable energy capacity progressively coming online - particularly the contribution of Sembcorp's recent acquisitions of assets in China.

Her higher fair value of S$3.20 is based on 1.4 times the FY2022 price-to-book value (P/BV) ratio, against 10-12 per cent the group's normalised ROE, but she believes valuations could further lift if the renewable energy plan is successfully executed.

Renewable energy is not the only re-rating catalyst in Ho's view. She also indicated that decarbonisation initiatives like the divestment of coal-fired power plants in China and India, and improving supply and demand of Singapore and India's power markets as factors prompting potential earnings upgrades in the future.

In this vein, she has raised the FY2022-2023 net profit by 14-22 per cent, factoring the China assets and earnings turnaround of India Plant 2, an energy plant owned by Sembcorp's India branch.

UOBKH analyst Adrian Loh likewise revised his earnings outlook for FY2022 and FY2023 upwards by 14 per cent and 23 per cent, citing the acquisitions in China and stronger than expected H2 FY2021 results from Sembcorp's energy business.

He indicated that an important aspect to look out for in future results is Sembcorp's ROE for the renewable segment. He expects an ROE of 5-7 per cent in the near-term, and believes it would later trend up towards 10 per cent and 20 per cent as the assets mature and increase in cash flow and profits.

However, he noted that the impact of future higher carbon tax, to be implemented by the Singapore government in 2024 and 2025, is still unknown. While the company's carbon tax could "increase exponentially" based on the planned rate of S$25/tonne announced in Budget 2022, the group is likely to divest some or all its carbon-producing plants, in Loh's view.

His higher target price of S$2.95 is pegged to a target 1.3 times P/BV ratio, which he had increased from 1.2 to reflect a better energy outlook based on UOBKH's belief that the Covid-19 peak is over, as well as to partially reflect the company's nascent transformation from a brown to green energy producer.

"We continue to foresee an upward re-rating of the company's valuation multiples due to the scarcity value of solid environment, social and governance companies in Singapore," Loh said, adding that at his current target price, Sembcorp would trade at a "reasonable" 13 times the forecasted FY2022 earnings.

Meanwhile, CGS-CIMB on Wednesday maintained its target price of S$2.96, as it is factoring in an average 15 per cent decline in profits for the conventional energy segment in FY2022.

This is despite the brokerage lifting its FY2022-2023 earnings per share estimate by 0.4-6 per cent on higher conventional energy profits in the longer term, offset by increased corporate costs.

The target price is implied to be 10.5 times the forecasted FY2023 price-to-earnings (P/E) ratio, higher than the Wednesday close price of S$2.46 that is trading at 9 times the projected FY2023 P/E ratio, but lower than the blended trading band of 14 times for the group's Asian peers, the brokerage added.

Shares of Sembcorp Industries were trading down 1.6 per cent or S$0.04 at S$2.42, as at 3.43 pm on Thursday.

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