Brokers’ take: Analysts see upside for Sembcorp after utilities outperform

ANALYSTS from Maybank, OCBC and DBS reiterated their “buy” calls on Sembcorp Industries on Monday (Aug 8), with Maybank upgrading its target price to S$4.50 on “all-around solid performances from conventional, renewable energy and stable integrated urban solutions” in H1.

Maybank analyst Kelvin Tan also raised his estimates on the energy player’s profits from FY2022 to FY2024 by between 76 and 86 per cent as he anticipates the earnings outperformance to accelerate in the second half of this year.

“Heightened spark spreads in Singapore and India coupled with full-year earnings from its newly acquired renewable portfolio in China presents an excellent opportunity to accumulate after pullback, in our view,” said Tan, noting that Sembcorp’s gross renewables capacity — both installed and under development — totalled 7.1 gigawatt, well ahead of its 10 gigawatt 2025 target.

Against the traded price of S$3.15, Tan’s target price represents an upside of approximately 42.9 per cent.

He was also upbeat on the company’s conventional energy arm, noting that it had swung to a net profit of S$397 million before exceptional items in the first half of the year — representing a 98 per cent gain quarter on quarter.

“We think that the catalyst in this segment is divestment of Sembcorp Energy India’s thermal power plants with profits replaced by earnings from renewable energy capacity expansion,” Tan said.

Given that electricity price hikes in Singapore and India are likely to continue amidst the rising input costs and gas production outages, Tan projected a 25 per cent earnings increase year on year for the company’s conventional energy segment in H2.

Profit in its renewables segment is also expected to gain 30 per cent year on year, boosted by full year performance of its recent China portfolio acquisition, he added.

Also optimistic on its renewables front, DBS raised its target price to S$3.80 as it believes the “good progress” of Sembcorp’s renewables strategy warrants further re-rating.

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Analyst Ho Pei Hwa believes decarbonisation initiatives such as divestment of coal-fired power plants in China and India could provide another catalyst for the company.

“We expect profit to normalise in H2 2022, though still stronger year on year taking into consideration the potential slowdown in economic activities but improved fundamentals of the power markets in Singapore and India,” Ho said.

Separately, OCBC also raised the target price to S$3.60, noting that the counter was the best performing item on the Straits Times Index year to date.

The research house was in contrast, more cautious on Sembcorp’s outlook, given that its net debt has risen from S$6 billion in FY2021 to S$7.4 billion in the first half of 2022.

Further, as floating interest rate debt makes up about half of its total debt, this leaves the company exposed to interest rate hikes, said researchers at OCBC.

DBS’s Ho however, thinks debt, together with internal cash flows, would help fund the company’s growth.

Potential catalysts for Sembcorp include accretive acquisitions in the region at reasonable valuation multiples, further push into renewables and higher power prices, OCBC’s researchers added.

Meanwhile, Maybank’s Tan thinks key risks for Sembcorp could come from global inflationary concerns with rising interest rates or borrowing costs in China — which would hurt margins, as well as prolonged shutdowns of the Sembcorp Energy India Project 2 or its biomass power station in UK.

Shares of Sembcorp were trading 2.6 per cent or S$0.08 higher at S$3.15 as at 11.28 am on Monday.