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Maybank increases Sembcorp TP to $6 citing 'confluence of growth factors'

Bryan Wu
·3-min read

Maybank analyst Kelvin Tan has reiterated his 'buy' rating for Sembcorp with an increased TP of $6.00, up from $4.35 previously.

Maybank Research analyst Kelvin Tan has reiterated his “buy” rating for Sembcorp Industries (Sembcorp) U96 with an increased target price of $6.00, up from $4.35 previously.

In his report dated June 9, the analyst cites more re-rating catalysts ahead for the company, such as Sembcorp’s recent renewables acquisition in the Middle East — its first renewable project in the region.

The company was recently awarded a contract by the Oman Power and Water Procurement Company (OPWP) to build, own and operate the Manah Solar II Independent Power Project in Manah, Oman. The 500-megawatt (MW) solar plant is expected to be operational by 2025 and will be backed by a 20-year power purchase agreement (PPA) with OPWP.

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Tan estimates Sembcorp’s investment in the project to be some $400 million, funded by debt and equity, with an estimated return on equity (ROE) of 8% to 10%, which would yield a profit of $10 million to $12 million per annum, or 1.4% to 1.7% of Sembcorp’s FY2025 earnings.

Sembcorp also recently signed a 10-year PPA with Singapore Telecommunications Z74 (Singtel), with an estimated annual contract value of $180 million. The PPA will be earnings-accretive from FY2023, notes the analyst.

With the inclusion of the Micron and Singtel contracts, he estimates that around 650MW to 700MW or around 60% of Sembcorp’s generating capacity is backed by contracts ranging from 1 to 18 years in length.

“But we believe Sembcorp needs to strike a balance and leave some capacity exposed to the spot market,” adds Tan.

As shorter-term contracts roll off, this could lead to Tan’s FY2023 conventional energy profit target of $629 million, a y-o-y increase of 4%. This is as spot prices continue to rise, he explains, pointing to the fact that the Uniform Singapore Energy Price (USEP) has remained strong year-to-date (ytd) at an average of $325 per megawatt-hour MWh.

Taking into account higher margins from Sembcorp’s recently secured long-term PPAs, Tan has raised his FY2023 to FY2025 earnings forecasts by 9% to 11%.

The analyst says that Sembcorp remains “undervalued” as his increased sum-of-the-parts (SOTP) based target price of $6.00, up from $4.35 previously and based on a 12x FY2024 price-to-earnings ratio (P/E), represents a 10% discount to regional utility peers, which are trading at an average of 13x FY2024 P/E.

With Sembcorp’s renewables portfolio growing to some 11 gigawatts (GW), exceeding its 2025 target of 10GW ahead of schedule, Tan foresee positive share price momentum when the company’s new target is set.

Other near-term catalysts for Sembcorp include the recycling of capital in assets it has held for a number of years and the listing of assets in yield vehicles. “This could help Sembcorp unlock the value of its assets and not be dragged down by an asset-heavy business,” Tan explains.

He notes that Sembcorp achieved an ROE of 22.5% for FY2022, which was generated by assets that are on average five years-old. “Given the confluence of growth factors presented, we have confidence this level of ROE can be sustainable in the next few years,” he adds.

Upside risks to Tan’s valuation include stronger-than-expected order wins from its key sectors, improving margins from continued cost controls and economies of scale, and higher dividend payouts from better earnings or cash flow outlook.

Meanwhile, slower contract wins, unexpected margin pressure from rising raw material and labour costs and project delays or even contract terminations remain downside risks for Sembcorp’s share price.

As at 2.45pm, shares in Sembcorp were trading 3 cents or 0.55% up at $5.50.

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