Sembcorp Industries - Phillip Securities 2021-05-31: Transition To Pan-Asian Sustainable Solutions Leader


Sembcorp Industries - Transition To Pan-Asian Sustainable Solutions Leader

  • Sustainable solutions portfolio to be 70% of profits by 2025, up from current 40%. Urban business land sales to triple to 500 hectares by then.
  • ROE of 10% and gross debt to equity at 1.3x by 2025 from 3.2% and 2.3x respectively.
  • We raise our target price to S$2.07 from S$1.77 as we peg Sembcorp Industries to 1.0x FY21 P/B, up from 0.85x previously, as we believe the detailed layout of its five year plan will drive a re-rating of the stock. However, as most positives have been priced in, and its ambition of transforming its portfolio is now new, we downgrade from ACCUMULATE to NEUTRAL.

What's New

  • Sembcorp Industries (SGX:U96) unveiled its strategic plan to transform its portfolio from brown to green, with growth powered by its renewable and integrated urban solutions businesses. It is positioning itself to be a leading pan-Asian provider of sustainable solutions.

The Positives

Sustainable solutions portfolio to form 70% of profits by 2025.

  • In 2020, sustainable solutions formed around 40% of Sembcorp Industries's net profit. In the next four years, Sembcorp Industries has a CAGR target of 30% for its renewable energy portfolio. It plans to achieve this by quadrupling gross installed renewable energy capacity to 10 GW through organic growth and joint ventures. It will not be making acquisitions to achieve this target. 2020 gross installed renewable energy capacity - comprising wind, solar and energy storage - was 2.6 GW.
  • Sembcorp Industries has projected capital expenditure (capex) of S$5.5bn for the next five years with 80% to be spent on renewables and 20% on urban development. This will be funded entirely by internal sources. As of 31 December 2020, Sembcorp Industries has approximately S$5bn of unutilised borrowing facilities to address any financing needs.
  • Sembcorp Industries will also have access to green and sustainability-linked financing from the banks to fund its capex needs. It is set to halve its greenhouse gas emissions by 2030 and deliver net zero carbon emissions by 2050. We believe it will accomplish this by aggressively growing its renewables capacity, improve its fuel mix, divest its thermal coal business, or possibly a combination of the three.

Urban business’ land sales to triple to 500 hectares by 2025.

  • 2020 land sales amounted to 172 hectares. Sembcorp Industries wants to triple this to 500 hectares in the next four years, which is more than double that of its five-year land sales average of 242 hectares. It plans to leverage its strong technical know-how and access to competitive international financing options, which further differentiates Sembcorp from the local property developers.
  • To hit its target, Sembcorp Industries will grow its land bank to 17,500 hectares by 2025 from 10,588 hectares in 2020. The Group has secured 2,874 hectares of development rights in Binh Duong III, Binh Dinh and Quang Tri in Vietnam. It will work towards adding 4,038 hectares to this land bank by 2025.

ROE of 10% and gross debt to equity at 1.3x by 2025.

  • Sembcorp Industries has set a target ROE target of 10% for 2025. This will be driven by a 30% CAGR in renewables and 10% CAGR in integrated urban solutions. It also intends to divest and recycle capital to improve debt/EBITDA to 5.4x in 2025 from 6.5x in 2020. With its well-established footprint and capabilities, we believe its ROE is achievable, though this will hinge on execution of its plans in the next four years.


  • We expect Sembcorp Industries to continue with its transition to sustainable solutions and sustainable development. Despite its ambitious growth plans, it will not require any equity fund-raising, relying entirely on internal sources. 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 PATMI by around S$100mn in the next five years, we keep our earnings estimates unchanged.

Downgrade to NEUTRAL, albeit with higher target price of S$2.07

Terence Chua Phillip Securities Research | 2021-05-31