Sembcorp Industries - UOB Kay Hian 2022-08-08: Strong Set Of 1H22 Results – Outlook Remains Bullish

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Strong Set Of 1H22 Results – Outlook Remains Bullish

Sembcorp Industries’s 1H22 results were significantly better than expected, easily beating both our and consensus’ expectations. Both the renewables and conventional energy segments benefited from volume growth and margin expansion and this is expected to continue in the medium term, thus resulting in the rest of 2022 likely remain strong.

An interim dividend of S$0.04 was declared.
We upgrade our earnings forecasts for 2022-24. Maintain BUY rating on Sembcorp Industries and raise target price to S$4.10.

Sembcorp Industries (SGX:U96) reported an extremely strong 1H22 with revenue increasing 45% y-o-y to S$4.8b. Its pre-exceptional NPAT of S$490m, double that of the year-ago period, was much better than expected, with the company’s renewables and conventional energy segments seeing strong net profit growth on a y-o-y basis.
Sembcorp Industries’s 1H22 revenue and EBITDA formed 56% and 87% of our full-year estimates respectively.
Sembcorp Industries declared an 1H22 interim dividend of $0.04 (payout ratio of 15%) vs $0.05 for 2021.
The major profit contributors in 1H22 were the conventional and renewables segments with a 115% and 217% y-o-y increase in net profit respectively. Conventional energy benefited from higher electricity prices in both Singapore and India, as well as a one-off gain from gas hedging.
In our view, the highlight was the renewables segment which saw broad-based growth from all of its three key markets:
1. solar operations in Singapore benefited from high spot electricity prices,
2. its newly-acquired projects in China started contributing in 1H22, and
3. higher wind-power generation in India.

In its outlook statement, Sembcorp Industries continued to paint a rosy 2H22 with results for the full year “expected to be significantly higher” on a y-o-y basis.
Sembcorp Industries expects its conventional energy segment to maintain its strong revenue performance while the renewables segment will exhibit sequential earnings growth due to a full half-year contribution from its new acquisitions in China, although the latter should be tempered somewhat by higher corporate and financing costs arising from the acquisitions.
In addition, Sembcorp Industries has two assets – Sembcorp Biomass Power Station in the UK and India's SEIL Project 2 – that will be offline for maintenance shutdowns in 2H22.

During the analyst briefing, Sembcorp Industries’s management identified its battery business as being a key growth driver for the company in the medium to long term. Currently, it has 120MW of energy storage in the UK which plays an important role in helping to stabilise the grid as renewables penetration increases.
In the past six months, Sembcorp Industries has further announced plans to construct a 200MW facility at Jurong Island as well as a 360MW battery facility at Teesside, UK. Assuming that the latter comes online in 2024, this would represent an approximate 10-fold increase in the size of its energy storage business over a 4-year period.

Sembcorp Industries’s net debt/equity fell to 175% at end-1H22 from 192% at end-21. Importantly, Sembcorp Industries has increased its weighted average debt maturity from 4.8 years to 5.1 years and lowered its weighted average cost of debt marginally from 4.8% to 4.7% in the past six months.
The key issue in the near to medium term for the management is to refinance its corporate debt that is due in the next 1-2 years which we believe is manageable.
One important change in Sembcorp Industries’s debt profile in the past year is the infusion of green and sustainability-linked borrowings which now constitute a material 32% of its total debt – we expect Sembcorp Industries to increase its borrowings for this segment in the next 12-18 months.

We upgrade our 2022-24 earnings forecast for Sembcorp Industries with the largest upgrade of 47% for 2022. Note that Sembcorp Industries booked “hedging gain and other income” of $92m in 1H22, which was a one-off and thus unlikely to be repeated. We were also conservative in our 2023-24 forecasts to account for higher operating expenses and interest income post the inclusion of the new China renewables acquisitions.
Maintain BUY rating on Sembcorp Industries with a higher target price of S$4.10 (+14% from S$3.59 previously) based on an unchanged target P/E multiple of 13.6x. This target P/E multiple is 1 standard deviation above the company’s past 5-year average P/E of 10.1x (excluding 2020 where the company reported impairment-related losses) and is applied to our 2023 EPS estimate which we believe is a better reflection of the company’s “normalized” earnings compared to 2022’s earnings.
We note that on both P/E and P/B basis, Sembcorp Industries trades at a discount to its utilities peers in developed Asia.
Sembcorp Industries remains one of our top picks in Singapore for the quality of its earnings as well as its growth prospects in the near to medium term.
See

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-08-08

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