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Sembcorp Industries - Phillip Securities 2022-09-15: The UK's Energy Bill Cap Expected To Have Subdued Impact

SEMBCORP INDUSTRIES LTD (SGX:U96) | SGinvestors.io SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Energy Bill Cap Expected To Have Subdued Impact

  • The UK’s new leader, Liz Truss, has capped consumer energy bills at £2,500 (S$4,081) for two years to cushion rising energy prices. The price cap imposed, limits the amount energy suppliers can charge for its tariffs.
  • Impact on Sembcorp Industries (SGX:U96) is expected to be subdued as the price cap will be funded by the UK government. The UK is also not a significant contributor to its overall portfolio of energy assets.
  • Review of the UK’s net zero strategy is underway, which could slow move to renewables. Liz Truss has announced dozens of new North Sea licenses in an effort to boost domestic oil and gas production.
  • We maintain ACCUMULATE rating on Sembcorp with unchanged target price of $3.68, still based on 1.2x P/BV, the average of its peers.



The news

  • The UK’s new leader, Liz Truss, has capped consumer energy bills at £2,500 (S$4,081) for two years to cushion rising energy prices. For businesses and public sector bodies, a sixth-month scheme will offer equivalent support to that for households, with a review in three months about how it could be better targeted.
  • Sembcorp Industries has 1.3GW of energy assets in the UK, consisting of energy generation and battery storage. The UK is not a significant contributor to its overall portfolio of energy assets, which are concentrated in South-east Asia, China and India.


The Positives


Impact on Sembcorp expected to be subdued as cap will be funded by UK government.

  • Sembcorp Industries’s contract with the national grid of the UK means that it generates electricity through a portfolio of diesel and gas generators. The price cap imposed, limits the amount that it can charge for its tariffs. The difference between the power in the wholesale markets, and the capped consumer price, however, is expected to be borne by the UK government.

Energybill cap will not be financed by energy suppliers.

  • Despite calls by the opposition Labour Party to partly fund the scheme by a windfall tax on energy suppliers, PM Liz Truss has ruled this out, favouring the entire bailout to be funded through more government borrowings instead.


The Negatives


Review of the UK’s net zero strategy underway; could slow move to renewables.

  • Liz Truss has announced a review of the government’s net zero strategy, which she argued is necessary under the current landscape. The review could potentially impact demand for energy storage, though this is still uncertain at this stage.
  • Liz Truss has announced schemes she said would increase energy resilience, including launching about 100 new oil and gas licenses along with dozens of new North Sea licenses in an effort to boost domestic oil and gas production.
  • In the last 10 years, the UK has made significant progress to decarbonise its power sector. It has grown its renewable share of electricity generation from 7% to 43%. This has led to increased demand for energy storage, in which Sembcorp Industries is operating one of the largest energy storage portfolios in the UK at 120MWh.


Outlook

  • The impact of UK PM Liz Truss’ moves on the energy sector are still uncertain at the moment as the finer details are lacking. The impact on Sembcorp Industries is expected to be subdued as the contribution from UK is not large. That said, we are monitoring the developments, and will provide an update when more details are available.
  • Sembcorp Industries is currently in the midst of building a 360MW energy storage system at Wilton International on Teesside, which will help the UK achieve its net zero target.


ESG

  • Sembcorp Industries’s environmental score of 1.28 still lags behind its peers according to data from Bloomberg. We believe the Group’s transition from brown to green has the potential to lift its environmental score rating over time.
  • Sembcorp Industries has committed to grow its profit contribution from its sustainable solutions to 70% by 2025 (35% in 2021), which could see greater interest from institutional investors looking for high ESG ranked companies.

Maintain ACCUMULATE with unchanged target price of $3.68






Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2022-09-15
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 3.680 SAME 3.680



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