Brokers’ take: Maybank positive on Sembcorp’s renewable acquisitions, raises target price to S$6
Samuel Oh
MAYBANK Research has raised its target price on Sembcorp Industries from S$4.35 to S$6.00, on optimism over the group’s earnings prospects in the next few financial years.
The revised target price is based on 12 times price-to-earnings ratio versus 10 times previously for FY2024 estimates. This represents a 10 per cent discount to other regional utilities companies, which are trading at an average of 13 times price-to-earnings ratio.
The research house, which maintains a “buy” call on the stock, is positive on Sembcorp’s recent renewable acquisitions in the Middle East – particularly the recent award of the group’s first contract in the region to build, own and operate a solar plant.
Maybank estimated Sembcorp’s investment in the project to be at S$400 million.
The research house also projected the return on equity (ROE) for this solar project to come in at 8 to 10 per cent, which would take profits to the range of S$10 million to S$12 million per annum.
This represents 1.4 to 1.7 per cent of the group’s FY2025 estimated earnings, noted analyst Kelvin Tan in a report last Friday (Jun 9).
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Tan also likes Sembcorp for its new power purchase agreement (PPA) with Singtel, which comes at an estimated contract value of S$180 million.
In the analyst’s view, the PPA will be accretive to Sembcorp’s FY2023 estimated earnings.
Based on recently secured long-term PPAs, Tan has lifted his earning forecasts for FY2023 to FY2025 by 9 to 11 per cent to account for higher margins.
He however cautioned that Sembcorp will need to “strike a balance and leave some capacity exposed to the spot market”.
As Tan believes spot prices will continue to rise, he estimates that the roll-off of shorter-term contracts could lead to a year-on-year upside of 4 per cent to the group’s conventional FY2023 energy profit target of S$629 million.
Highlighting that Sembcorp’s renewables portfolio has exceeded its target of 10 gigawatts and is ahead of its 2025 target, Tan said he anticipates “positive share price momentum” arising from the expected introduction of a new target going forward.
He also believes the group’s current level of positive ROE “can be sustainable in the next few years” given a “confluence of growth factors”.
Tan says other near-term catalysts include capital recycling in assets and listing of assets in yield vehicles “which would help Sembcorp to unlock the value of its assets and not be dragged down by an asset-heavy business”.
Shares of Sembcorp Industries were trading 0.4 per cent of S$0.02 down at S$5.45, on Monday (Jun 12) at 1125 am.
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