SEMBCORP INDUSTRIES LTD (SGX:U96)
Sembcorp Industries - Readying Itself For The Future
- Scope to re-rate further on renewables strategy.
- For stock to sustain higher valuations, execution of strategy is critical.
- Transforming portfolio to include more sustainable solutions; details later in May.
Potential for further-rerating, now on renewables
- Sembcorp Industries (SGX:U96) and Sembcorp Marine (SGX:S51) went through a de-merger exercise which concluded in 2H20, which the market viewed favourably and led to the re-rating of Sembcorp Industries from about 0.4x P/B previously to around 0.9x P/B.
- Looking ahead, if the group is able to execute its strategy on renewables, there could be potential for further re-rating.
How big is renewables for Sembcorp Industries currently?
- Currently, about 3,300 MW, or 25% of Sembcorp Industries’s total energy is in renewables, with the remaining 75% in thermal. Of the 3,300 MW capacity, ~2,600MW is installed capacity, and ~600 MW is under development. In 2020, about 20% of the group’s bottom-line was attributed to renewables.
- Recall that besides SCI Energy, Sembcorp Industries also has an urban development business which owns and develops land across Asia.
Not expecting a significant recovery in utilities yet
- As mentioned in our earlier report, the utilities business will take time for more significant recovery. Even before COVID-19, in certain countries, demand was already relatively soft, such as in India and the UK due to individual industry-specific factors.
- Excluding exceptional items, net profit for the Energy business was S$297m in FY20 compared to S$360m in FY19.
- Looking ahead, Sembcorp Industries will also be impacted by changes in customer profile in the UK and Singapore, as well as the loss of income from divested assets in Panama and Chile.
Successful execution of strategy is critical
- However, the market may look beyond this, and investors could opt to assign a higher multiple on the transformation to a more renewables-focused business. This is especially since many overseas renewable plays trade at relatively higher valuations.
- As mentioned in our earlier report, we expect Sembcorp Industries to release more details on its renewable strategy in late May 2021, following the appointment of its new Group President and CEO, Mr. Wong Kim Yin last year.
- Currently, the stock is trading at 11.5x forward P/E and 1.05x P/B. Utilities which are renewable leaders such as NextEra Energy in the US is trading at 31x forward P/E and 3.6x book, while Iberdrola in Europe is trading at about 19x P/E and 1.8x book. We acknowledge the growth profile of such leaders may not be directly comparable for now, but this only shows the gap between Sembcorp Industries’s current valuations and global renewable leaders. For Sembcorp Industries to successfully re-rate and stay so, execution of the renewables strategy is critical. We roll forward our valuations and update our fair value estimate for Sembcorp Industries from S$1.85 to S$2.50.
- See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.
OCBC Research Team
OCBC Investment Research
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https://www.iocbc.com/
2021-04-21
SGX Stock
Analyst Report
2.50
UP
1.850
