Brokers’ take: DBS raises Sembcorp target price to S$4.50

DBS Group Research has raised its target price on Sembcorp Industries to S$4.50 from S$3.80, as it rolls over its valuation estimates to FY2023. 

The revised target price includes an estimated 25 per cent compound annual growth rate (CAGR) in the renewables segment, a higher price-to-earnings (P/E) multiple target of 12 times compared to 10 times as well as a potential dividend yield of 2 per cent. 

DBS, which maintains its “buy” call on the stock, on Friday (Feb 10) said its FY2023 estimates factor in three acquisitions carried out last November, which will be completed in the first half (H1) of this year.

Ahead of the company’s H2 FY2022 earnings release on Feb 21, analyst Ho Pei Hwa is expecting Sembcorp to declare a special dividend of S$0.02, on top of a final S$0.04 dividend. Including a S$0.04 interim dividend, it would bring the group’s full-year dividend per share to S$0.10.  

This implies a higher payout ratio of 22 per cent, which DBS noted is at the higher end of the 19 to 24 per cent range over the past three years.  

While the revised 12 times P/E valuation of the stock is in line with its regional peers’ average, Ho said the uplift could come from accretive renewable acquisitions and efficient capital recycling, to fund future growth and enhance shareholder return. 

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Both factors are expected to impact Sembcorp’s share price, with the acquisition of renewables currently being the key driver, said Ho. 

Underscoring Sembcorp as the “best renewable proxy” listed on the Singapore Exchange, Ho sees the company’s sustainable solutions net profit accelerating to a more than 40 per cent year-on-year growth in FY2023, after booking maiden full-year contributions from its renewable energy acquisitions in H2 FY2022. 

This comes despite an expected moderation of earnings from conventional energy, said Ho, as profits from the sustainable solutions segment “remain on a rapid growth trajectory”. 

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Based on Sembcorp’s closing price of S$3.72 on Thursday, the new target price implies a 21 per cent upside potential – of which 10 per cent could come from CAGR growth in renewables, and 11 per cent on the higher valuation. 

Ho is also positive on Sembcorp’s expanded gross renewable capacity, and highlighted a potential opportunity for the group to divest its remaining coal-fired power plant in China.