Brokers' take: Phillip downgrades Sembcorp to 'neutral', says positives priced in

PHILLIP Securities has downgraded its call on Sembcorp Industries to "neutral" from "accumulate" with the view that most positives have been priced in for the group.

The research house's move comes despite its higher target price of S$2.07 compared to the former S$1.77 target, as it now pegs Sembcorp to one times FY2021 price-to-book value. This is up from 0.85 times previously, as Phillip believes Sembcorp's detailed layout of its five-year strategic plan to transform its portfolio "from brown to green" will drive a rerating of the stock.

In a report on Monday, analyst Terence Chua said the revised valuations reflect Sembcorp's improving outlook and stronger operating metrics expected for FY2021 and FY2022.

"However, as most of its positives have been priced in and its ambition of transforming its portfolio is not new, we downgrade from 'accumulate' to 'neutral'," he added.

Mr Chua nonetheless remains positive of the group's transition to sustainable solutions and sustainable development, noting that it will not require any equity fundraising despite its "ambitious growth plans".

"Owing to persistent uncertainties surrounding recovery from the Covid-19 pandemic, intense competition from other global utility companies and expiry of long-term contracts impacting profit after tax and minority interests by around S$100 million in the next five years, we keep our earnings estimates unchanged," he said.

The analyst deems Sembcorp's return on equity (ROE) target of 10 per cent for 2025 "achievable" due to its "well-established footprint and capabilities".

He also believes the group will aggressively grow its renewables capacity, improve its fuel mix, divest its thermal coal business - or possibly a combination of the three - to achieve its goals of halving its greenhouse gas emissions by 2030 and deliver net zero carbon emissions by 2050.

Shares of Sembcorp ended Monday S$0.03 or 1.4 per cent higher at S$2.23.