Sembcorp Industries - Maybank Research 2022-08-02: The Green Pivot; Initiate Coverage with BUY

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SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - The Green Pivot; Initiate Coverage with BUY

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• We initiate coverage on Sembcorp Industries (SGX:U96) with BUY and a SOTP-based target price of S$3.40, implying 14% upside. We like Sembcorp Industries due to:
  1. substantial additional earnings potential from its plan to boost renewable energy (RE) capacity to 10GW by FY25E;
  2. continued high tariffs contributing to good spark spreads in Singapore and India;
  3. resilience to rapid inflation and high interest rates;
  4. uniqueness amid scarcity of solid ESG companies in Singapore;
  5. attractive valuation as Sembcorp Industries consistently generates higher ROE than peers and is trading at a discount to Asian utilities peers.

Fulfilling insatiable demand for Renewable Energy

• According to International Energy Agency (IEA), global energy demand is poised to surge 47% by 2050 as electrification increases and living standards improve. Renewable Energy would be the fastest growing energy source, increasing from 2% in 2020 to 18% of total energy in 2030E.
• Renewable Energy is Sembcorp Industries’s fastest-growing segment in our forecasts, potentially boosting Sembcorp Industries’s earnings by 22-25% y-o-y pa until FY24E. A key metric to monitor is renewable ROE growth, which we project to rise to ~10% (FY21:4.6%) and head northwards to ~20% as assets mature, cashflow contribution rises and project debt repaid.

Elevated electricity prices drive earnings higher

• Due to persistently high tariffs in India (+58% y-o-y) and Singapore (+242% y-o-y), we expect spark spread for Sembcorp Industries’s conventional energy to surge by 3ppt y-o-y and a full-year contribution of exceptional profits (+6% y-o-y) from Cogen in FY22-FY23E.
• Of note, 85% of SEIL plant 1 and plant 2 are underpinned by long-term and mid-term power purchase agreements (PPA), putting Sembcorp Industries’s India business in a stronger position financially in FY22E. The Indian tariff hikes coupled with stable plant loading factor (PLF) of above 70% since Feb‘22 for plant 2 may continue to boost Sembcorp Industries's PATMI (+23% y-o-y) in FY22E.

Attractive investment in Singapore renewables

• We project Sembcorp Industries’s FY22E earnings to beat consensus and view any pullback in Sembcorp's share price as an opportunity to buy. At 10.3x FY22E P/E, Sembcorp Industries is undervalued compared to regional utilities peers (average 20.7x) and Singapore industrial peers (~17.8x).
• Sembcorp Industries has been consistently generating higher ROE (13.1%) than peers. It maintains a high return on sustainable equity ratio compared with top Asian utilities and Singapore industrial peers.
• Potential re-rating catalysts would be divestment of Sembcorp Industries’s thermal power plant in India with profits replaced by earnings from Renewable Energy capacity expansion as SEIL focuses on decarbonisation.
• See
  • Sembcorp's Share Price,
  • Sembcorp's Target Price,
  • Sembcorp's Analyst Reports,
  • Sembcorp's Dividend History,
  • Sembcorp's Announcements,
  • Sembcorp's Latest News.
• Key risks include unplanned shutdowns, unexpected impairments and decline in spot electricity prices in Singapore or India.
• Sembcorp Industries’s FY23-24E earnings growth to be backed by strong order book. Continue to read the 30-page report below for complete analysis on Sembcorp Industries.

Kelvin TAN Maybank Research | https://www.maybank-ke.com.sg/ 2022-08-02

SGX Stock Analyst Report BUY INITIATE BUY 3.40 SAME 3.40