Sembcorp Industries - DBS Research 2021-05-28: Sustainability At The Core; Roadmap Unveiled


Sembcorp Industries - Sustainability At The Core; Roadmap Unveiled

  • Sembcorp Industries is aiming for 70% earnings contribution from sustainable solutions and 10% ROE by 2025.
  • Growing renewable portfolio by 30% CAGR, accounting for 80% of group capex budget of S$5.5bn in 2021-2025.
  • Investment to be funded by green financing, internal cash and divestment; no imminent equity-raising.
  • Reiterate BUY call on Sembcorp Industries; target price lifted to S$2.40.

Sembcorp Industries's Green transformation roadmap.

  • Sembcorp Industries (SGX:U96) has unveiled a strategic plan to transform its portfolio from brown to green. Key highlights of the strategy:
    1. Sembcorp Industries aims to grow profit contribution from its sustainable solutions portfolio from a current 40% to 70% by 2025.
    2. This will be achieved through a 30% CAGR in Sembcorp Industries's renewable energy portfolio (quadrupling renewable energy capacity that includes wind, solar and energy storage to 10GW by 2025) and a 10% CAGR in integrated urban solutions portfolio (tripling land sales to 500 hectares by 2025).
    3. Sembcorp Industries is committed to halving its greenhouse gas emissions by 2030 (from a 2010 baseline of 5.4m tCO2e) and deliver net-zero emissions by 2050.
    4. Sembcorp Industries commits to not invest in new coal-fired energy assets.
    5. Sembcorp Industries plans to spend S$5.5bn capex in 2021-2025, out of which 80% will be allocated for renewables. This will be funded by project debt (50%), tapping on ESG capital, and divestment, capital recycling and operating cash flow (50%).
    6. By 2025, Sembcorp Industries targets 10% ROE (from 6% in 2020), 5.4x Debt/EBITDA (from 6.5x in 2020) and 4.0x EBITDA/Interest (from 2.8x in 2020).

Well positioned to be a leading Pan-Asian provider of sustainable solutions, particularly in Southeast Asia, China and India.

  • While competition might be keener in the renewable space, Sembcorp Industries has established footprint and capabilities to grow, with cost advantage leveraging on its strength as a project developer and in-house O&M.

Managing group debt maturity; no immediate equity-raising need.

  • Sembcorp Industries had ~S$5.0bn of unutilised borrowing facilities as of 2020 to address any refinancing needs. It also targets to maintain at least S$1.5bn of committed RCF capacity to provide interim bridge liquidity.
  • Management reassures that equity-raising is not the primary source of funding to execute the company’s growth plans.

Recent commodity boom and material cost hike are manageable.

  • The recent spike in material cost, especially for polysilicon (raw material for solar panel), is not expected to affect the growth plan. Sembcorp Industries's management believes that price hike is driven by temporal supply shortages which will rebalance in the next few quarters.

Trim Sembcorp Industries's FY21F earnings forecast in view of current COVID situation.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2021-05-28
SGX Stock Analyst Report BUY MAINTAIN BUY 2.40 UP 1.850