Broker's take: UOB KayHian raises Sembcorp Industries target price to S$3.59

UOB Kayhian has raised Sembcorp Industries' target price to S$3.59 from the previous target of S$2.95, on the back of higher expected earnings and aggressive plans to build up its renewable energy business.

This represents a potential upside of 25.5 per cent from its last closing price of S$2.86, and a target share price which is 13.6 times of the company's earnings per share, otherwise known as price-to-earnings ratio, a common measurement used for valuing companies.

In a research note on Monday (Apr 18), UOB KayHian analyst Adrian Loh said that the energy and urban development company is current trading at a discount relative to other utility companies in developed Asia-Pacific economies, which is estimated to be trading at an average price-to-earnings ratio of 16.8 times in 2022.

Loh also revised Sembcorp Industries' earnings from 2022 to 2024 higher by between 6 and 11 per cent due to a better-than-expected contribution from the Singapore power market and a turnaround to profitability of its Indian power business in 2022.

Sembcorp Energy India had signed 2 long-term supply contracts in Jan and Feb this year, putting the company in a stronger financial position and enhancing its appeal to potential buyers.

Loh also noted that Sembcorp Industries : U96 0% has been active on the business development front, with nearly one deal every month since July last year, and all of these deals are focused on expanding its renewable energy footprint.

"We believe the company will remain busy with more renewables deals for the remainder of 2022," he added.

While a number of these projects are still in the planning stage, Loh believes that Sembcorp Industries has built up its renewable energy portfolio "quite aggressively", with its gross installed capacity at 2.6 gigawatt at the start of 2021 to 5.3 gigawatt currently.

This excludes another 1.1 gigawatt still in development.

"We believe that the company is on target to achieve its plans of increasing its renewable capacity to 10 gigawatt by 2025," read the research note.

Loh also noted that there is market confidence in the company’s strategy, as seen in how its sustainability-linked notes, which were issued in October 2021 and April 2022 and worth a total of S$975 million, were well-subscribed.

Despite its expansion into renewable energy, Loh expects conventional energy to still have an outsized contribution in the earlier part of this year due to the current high prevailing electricity prices in India and Singapore.

Nevertheless, Loh said that the return on equity for Sembcorp Industries' renewable business would be a key indicator to look out for going forward.

The return on equity in 2021 is at 4.6 per cent. However, Loh expects this to increase to between 5 and 7 per cent currently as the assets mature.

"However, as assets mature and earnings and cashflow contribution increases, coupled with the paying down of project debt, ROE (return on equity) is expected to trend up to 10 per cent and head northwards to 20 per cent as they get older," he said.