Sembcorp Industries - UOB Kay Hian 2021-04-08: Slowly & Surely Building Up Its Renewables Portfolio

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Slowly & Surely Building Up Its Renewables Portfolio

On the renewables front, Sembcorp Industries (SGX:U96) has had a solid 2021 thus far, winning 82 mwp of solar projects in Singapore and a 400mw utility-scale solar project in Rajasthan, India.
In our view, Sembcorp Industries appears to be well on track to meet its current target of having 4,000 mw in renewables capacity by 2022 vs 3,218 mw as at end-20. We highlight that Sembcorp Industries may increase its renewables target at its May 21 investor day.
Maintain BUY with a higher target price of S$2.27 (previously S$2.00).

In Mar 21, Sembcorp Industries announced that it had won two projects totalling 82 megawatt-peak (mwp) in Singapore, placing it as the leading solar energy provider in Singapore with over 362 mwp of solar power capacity in operation and under development. See Sembcorp's announcement dated 12-Mar. The 2 projects include:
1. a second SolarNova project of 60 mwp that was awarded by the Housing & Development Board (HDB) and the Singapore Economic Development Board (EDB), and
2. the SolarRoof Phase 2 project awarded by the JTC Corporation to build a 17.4 mwp system on the rooftops of 48 JTC buildings.

Following Sembcorp Industries’s second tender win in the SolarNova programme, we expect to see further solar-project wins as the use of solar energy in HDB’s and government buildings will continue to rise, in our view. In 2021, earnings growth in the renewables business will come from the 3Q21 commissioning of its 60 mwp floating solar PV system on the Tengeh Reservoir.

In early-Jan 21, Sembcorp Industries won a 400mw solar power project in Rajasthan, India with the output to be sold to the Solar Energy Corporation of India (SECI) under a 25-year power purchase agreement. While Sembcorp Industries’s winning bid with a tariff of Rs2,000/mwh was the lowest for utility-scale PV auctions, we note that the winning tariffs have been declining over time. Thus, Sembcorp Industries believes that it will be able to generate a good return on this project due to lower technology and equipment costs and the existence of good infrastructure in Rajasthan.
Currently, Sembcorp Industries has 800mw of wind projects from earlier bids and a total of 1,730mw of operational renewables across nine states in India.

With the civil unrest in Myanmar showing no signs of abating any time soon, Sembcorp Industries’s Myanmar business may be impacted in the medium to long term.
Sembcorp Industries’s subsidiary, Sembcorp Myingyan Power, operates a 225 mw gas-fired power plant in Mandalay, Myanmar, and while the power plant continues to be in operation and its employees are safe, there is no certainty that such operations will continue in the medium to long term.
As at end-20, the net book value of the power plant was US$57m with US$230m project’s loan remaining outstanding, backed by a corporate guarantee issued by the company.

As Sembcorp Industries’s renewables portfolio has become larger in the past three years (at the same time as its marine segment’s declining influence on its bottom-line), the company has improved the financial disclosure of its renewables portfolio.
While renewables contributed only 15% of Sembcorp Industries’s net profit before exceptional items in 2020, the business now generates the highest net margins out of all of Sembcorp Industries’s segments. Given the potential growth profile of this segment, we look forward to a greater degree of disclosure going forward.

Re-iterate our BUY rating on Sembcorp Industries with a higher P/B-based target price of S$2.27, a 13.5% increase from our previous target price of S$2.00. We have pegged our new target price to a P/B multiple of 1.1x (previously 1.0x) which is 1.5 standard deviation above its 5-year average of 0.9x. We view this as reasonable given:
- Sembcorp Industries’s increasing exposure to renewables will make the company appear more attractive to investors with an ESG bent, and
- strong earnings recovery prospects in 2021.
On a P/E basis, Sembcorp Industries’s 2021F P/E of 12.2x is an 8% discount to its past 5-year average of 13.2x.
See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.
After our target price upgrade today, Sembcorp Industries offers a 16.5% upside as well as a 2021 dividend yield of 2.9%, thus implying a 19.4% total return.

Sembcorp Industries's May 21 investor day which will likely see an upgrade in the company’s renewables targets as well as highlighting the company’s renewables and ESG credentials.
Sustained economic recovery as the COVID-19 outbreak subsides, thus leading to an increased demand for energy and utilities.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-04-08

SGX Stock Analyst Report BUY MAINTAIN BUY 2.27 UP 2.000