Hot stock: Sembcorp hits 10-month high amid positive HSBC, Credit Suisse ratings

SHARES of Sembcorp Industries hit a 10-month high on Monday after HSBC upgraded its call to "buy" from "hold", while Credit Suisse initiated coverage on the stock with "outperform".

The counter was trading at an intraday high of S$2.08 on Monday, up 7.2 per cent or S$0.14 as at the midday trading break, with 18.1 million shares changing hands. The last time the counter closed near this level was on June 9, 2020 at S$2.09.

On top of upgrading Sembcorp to "buy", HSBC raised its target price to S$2.61 from S$1.68, implying a 2021 price-to-book multiple of 1.3 times which is slightly higher than Sembcorp's peers.

HSBC said it now values Sembcorp's energy division at an estimated enterprise value (EV) eight times that of the group's earnings before interest, taxes, depreciation and amortisation (Ebitda). This is a slight premium to the research team's estimated 2021 market capitalisation-weighted EV/Ebitda multiple of Sembcorp's peers.

"The premium is to acknowledge that SCI (Sembcorp) is the only Singapore-based energy company listed on STI (Straits Times Index)," HSBC said.

The HSBC research team has updated its free cash flow (FCF) generation forecasts for Sembcorp, leading to lower net debt for its 2021 forecast. It said a mix of "good underlying FCF generation" and additional debt are likely sources of support for future growth.

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All eyes are on Sembcorp's investor day scheduled in May, where management is likely to announce its renewables ambitions, HSBC noted.

Separately, Credit Suisse initiated coverage on Sembcorp with "outperform" and a target price of S$2.40. This is based on a sum-of-the-parts valuation implying an FY2021 price-to-book ratio of 1.2 times.

Credit Suisse believes most of Sembcorp's renewables capacity additions would be in India, supported by the country's target to double its renewables capacity to 175 gigawatts by 2022.

The Credit Suisse research team expects Sembcorp's return on equity to rebound 9-10 per cent in FY2021-2022, from 3 per cent in FY2020. This will be mainly due to demand normalisation and the absence of significant impairments.

Separately on Monday, Sembcorp said it has received notice from major customer Eastman Chemical Singapore to terminate its utilities services agreement. This came after Eastman exited its manufacturing site operations on Jurong Island.

Eastman's contribution was 5 per cent of Sembcorp's FY2020 net profit before exceptional items, from continuing operations. The group's profit from continuing operations for the period stood at S$157 million.