Yahoo Finance Sembcorp Industries Turns its Portfolio from Brown to Green: Can its Share Price Continue Soaring?
Sembcorp Industries Limited (SGX: U96), or SCI, is having its time in the sun.
The blue-chip utility group has not only seen its share price surge 51.2% year to date but also doubled its interim dividend when it announced its fiscal 2022’s first half (1H2022) earnings.
This performance is a far cry from the painful decline that investors had to endure from November 2012 through to September 2020.
This period saw a steady fall in SCI’s share price of around 72.4% from S$4.79 to a low of S$1.32.
The dividend per share also plunged from S$0.15 in FY2012 to just S$0.04 in FY2020.
With the group’s dividend heading up and its goal to transform its utility portfolio, can investors see SCI’s share price recover to its previous highs?
Fertile ground for sustainable growth
SCI’s transformation began in earnest in 2020 after it divested its entire shareholding in Sembcorp Marine Ltd (SGX: S51) to focus its energy on utilities and urban development.
The group also hosted an Investor Day in June last year to outline its strategic vision for 2025.
There were several key objectives that the utility group was working towards.
The first was to quadruple its renewables installed capacity by 2025 to 10 gigawatts (GW).
Another objective was to grow the profit contribution from its sustainable solutions portfolio from 40% to 70% by then.
If everything worked out as planned, the return on equity for the group will hit 10%, more than tripling from the 3% in 2021.
Accelerating its transformation
SCI has made significant strides towards attaining these objectives.
For its 1H2022 earnings, its gross installed capacity hit 5.4 GW, with another 1.7 GW under development, for a total of 7.1 GW.
However, only 25% of its net profit came from sustainable solutions, a far cry from its 2025 goal of 70%.
The group announced two acquisitions in quick succession over the week to accelerate the transformation of its portfolio from brown to green.
The first was for three solar panels with a total capacity of 795 megawatts (MW) for a consideration of around S$3 million and a future capital injection of around S$222 million.
These solar assets are located in Hebei province in China and are contracted to the State Grid Corporation of China, a state-owned utility and grid operator.
This purchase raises SCI’s gross installed capacity to 7.9 GW.
The second acquisition is that of a 100% interest in Vector Green, an independent power producer with renewable energy assets spread across 13 states in India.
Its portfolio includes 495 MW of solar capacity and 24 MW of wind capacity along with an additional 64 MW of solar projects being developed.
If Vector Green is included, the total Indian gross renewables installed portfolio will hit three GW.
This acquisition, expected to close by the first quarter of 2023, will boost SCI’s gross installed capacity to 8.5 GW, inching it ever closer to its 2025 target of 10 GW.
Holding out for higher dividends
SCI has already demonstrated its penchant for paying out higher dividends.
Its 1H2022 net profit before exceptional items nearly doubled year on year to S$490 million.
The group also announced the sale of its Indian Energy division two months ago for S$2.1 billion to strengthen its balance sheet and advance its objectives.
This divestment frees up cash for reinvesting into more renewable energy assets.
However, investors could also hold out hope for a higher final dividend or even a special dividend if the group has cash exceeding its requirements.
Get Smart: Share price will move in tandem with the business
SCI’s recent moves show its continued commitment towards transforming its portfolio from brown to green.
Its goal of achieving 10 GW in gross installed capacity looks within reach as it still has three years to go and only needs 1.5 GW more to fulfil its goal.
There’s even the possibility that SCI may exceed its goal and end up with a portfolio heavy on sustainable solutions by 2025.
Investors will be waiting to see if more of its profits come from its renewables portfolio compared to its legacy one.
And if net profit continues its upward trend, we are confident the share price will also rise in tandem.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
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