'Buy' calls around for Sembcorp following strong FY2022

Analysts are upbeat on Sembcorp's outlook following its stellar FY2022 results.

Sembcorp Industries (SCI) U96 recently announced its results for the FY2022 ended Dec 31, 2022, which beat consensus’ expectations.

The group’s earnings came in 204% higher y-o-y at $848 million for the full-year, with turnover on continuing operations increasing 22% y-o-y to $7.38 billion, mainly from the renewables and conventional energy segments. Including discontinued operations, turnover for FY2022 increased by 21% y-o-y to $9.40 billion.

For the 2HFY2022 period, earnings were 54% higher y-o-y at $385 million, with turnover on continuing operations sporting a small 3% increase to $3.92 billion. Including discontinued operations, turnover for the 2HFY2022 increased by 3% y-o-y to $4.64 billion.

According to analysts, the results have outperformed and exceeded their estimates.

For Maybank Securities, analyst Kevin Tan has kept his positive stance and “buy” call on the stock, while increasing target price to $4.35 from $4.00 previously. He is also raising FY2023-FY2025 net profit forecasts by 5%-11% to $675 million, $683 million and $692 million respectively. This is to reflect strong contribution from the group’s conventional energy segment with locked power spreads, expansion of the renewable segment from acquisitions and interest payments from the divestment of Sembcorp Energy India Limited (SEIL).

Tan notes that the conventional energy segment was boosted by higher power prices and margins in both Singapore and UK. “Although we think that the tariffs in India and Singapore will soften while remaining volatile, the segment will recognise income from the deferred payment note (DPN) after completion of the sale of SEIL,” says Tan.

Meanwhile, Tan is aware of the group’s high gearing, but is confident on the group’s ability to recycle capital with partial stake sales or securitising mature cashflow mature cashflow generating assets unlocking value in current assets and grow its renewable portfolio further. “With the bulk of its portfolio on long-term contracts, we remain optimistic on its growth prospects and are not overly concerned as earnings taper off from a record high in FY2022, which was led by unprecedented high tariffs and profitability for the conventional energy segment,” says Tan.

UOB Kay Hian has similar sentiments as analyst Adrian Loh too has kept his “buy” call with an increased target price of $4.57 from $4.10 previously. With the results outperformance thanks to the group’s conventional energy segment as well as contribution from its new renewable assets in China, Loh is in the view that the group will undertake more mergers and acquisitions (M&As) in the renewables space this year, as it has about $3.7 billion to capitalise on such opportunities. “This could drive share price performance,” he says.

On the group’s high debt levels, the management has stated that it will look to reduce its reliance on project finance and instead increase corporate loans, especially green and sustainability loans.

With the higher FY2022 earnings, Loh has upgraded his earnings forecast by 21% and 17% for FY2023 and FY2024 to $658 million and $662 million respectively.

“We were admittedly very conservative with the Sembcorp Industries’ FY2023 and FY2024 earnings estimates as we had believed that its higher-than-normal conventional energy earnings from FY2021 and FY2022 could not be sustained. However, it would appear that the high margins generated in this segment will remain for a while longer given current energy market conditions,” says Loh, adding that he has the impression that the group is quietly confident about its business prospects in FY2023, at the recent analyst briefing.

For CGS-CIMB Research, analysts Lim Siew Khee and Izabella Tan have kept their “add” call Sembcorp Industries with unchanged target price of $5.12.

The analysts believe that the group can maintain continuing operations’ return on equity (ROE) of 15%, compared to pre-Covid of about 4%, in FY2023-FY2025 as it has locked in capacity for the conventional energy segment for one to three years. They have also raised their core EPS estimated by 2% for FY2023 to 46 cents on the back of sustained strength in conventional energy power prices with opportunity for fuel source optimisation.

Meanwhile, the analysts also note that the group’s renewables acquisitions are making meaning contributions. With that, they expect Sembcorp Industries to progressively add 1,378MW (1,354MW solar, 24MW wind, including 64MW of solar under development) from the acquisition of Vector Green and BEI Energy in FY2023. “We forecast renewables segment’s net profit to grow by 24% y-o-y to $174 million (about 21% of group’s net profit) in FY2023,” says Lim and Tan.

DBS Group Research too has kept its "buy" call with an increased target price of $4.60 from $4.50 previously. Anlayst Ho Pei Hwa is upbeat on the group's sustainable solutions.

"With the impeccable execution of its “brown-to-green” transformation strategy in mid-2021, Sembcorp Industries has accomplished its key targets way ahead of 2025. It has quadrupled its renewable portfolio in 1.5 years to reach its target of about 10GW, representing about 60% of its total power portfolio," says Ho.

While Ho notes that the market is looking forward to the group’s new target for its renewable portfolio, its gearing level is
relatively high. But she notes that it has the flexibility to recycle capital, such as securitising mature, stable cash flow-generating assets. "Hence, we remain optimistic on Sembcorp Industries’ growth prospects ahead and are not overly concerned with earnings tapering off from the record high in FY2022, which was led by unprecedentedly high tariffs and profitability for conventional energy," says Ho.

As at 4.50pm, shares in Sembcorp Industries closed at $3.79.

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