Introduction to Sembcorp Industries

Sembcorp Industries (SCI) is a leading conglomerate headquartered in Singapore with a diversified portfolio spanning utilities, sustainable solutions, and urban development. With Temasek Holdings as a major shareholder owning 49.5%, SCI is well-positioned to leverage its strong backing for global project bids. The company is actively pursuing its energy transition goals while maintaining a balanced approach to profitability and sustainability.

Investment Thesis: Driving Transformation Amid Challenges

The report by Maybank Research outlines a compelling investment thesis for SCI. Despite challenges in achieving its ambitious sustainability targets, the company’s diversified portfolio and strong gas sales provide a solid foundation for earnings visibility. The recommendation for SCI is a “BUY” with a 12-month price target of SGD 6.20, reflecting a 13% upside from the current share price of SGD 5.50.

Performance and Strategic Outlook

Sustainable Solutions: A Mixed Performance

SCI had initially set a goal to achieve 70% of group net profit from its Sustainable Solutions portfolio by FY25. However, due to elevated profits from gas sales and a demand-supply imbalance in renewable energy markets, this target is likely to be missed. For 1H24, the contribution from sustainable solutions dropped to 31% of net profit, down from 45% in FY21. Subsequently, SCI has removed the profit mix target for FY28, focusing instead on achieving 25GW of renewable capacity and reducing emissions intensity to 0.15 tCO2e/MWh.

Shift in Business Emphasis

The company’s strategy refresh at the end of FY23 underscores a shift in focus. While renewable energy remains a critical component, SCI has acknowledged the longer-than-expected timeline for energy transition milestones. Nonetheless, SCI continues to allocate 90% of its planned SGD 14 billion capex (for FY24-28) to sustainable businesses, signaling its commitment to green energy.

Financial Metrics and Projections

Key Financial Highlights

• For FY22, SCI reported revenue of SGD 7.83 billion, EBITDA of SGD 1.19 billion, and core net profit of SGD 871 million.
• In FY23, core net profit grew by 11.4% to SGD 970 million, driven by higher power prices and strong gas sales.
• FY24 projections indicate a slight decline in revenue to SGD 6.72 billion, with core net profit expected at SGD 943 million, reflecting a 2.8% drop year-on-year.

Long-Term Outlook

Maybank Research projects a 10% CAGR in net profit from FY22 to FY28, with the renewables segment expected to drive a 29% CAGR during the same period. Conversely, the conventional energy segment is forecasted to decline at a CAGR of -1%, reflecting the company’s ongoing shift toward green energy solutions.

Valuation and Risks

Sum-of-the-Parts Valuation

SCI is valued using a sum-of-the-parts (SOTP) method, applying a 10% holding company discount. The valuation breakdown is as follows:

• Conventional Energy: SGD 7,320 million (SGD 4.10 per share)
• Renewables: SGD 4,251 million (SGD 2.38 per share)
• Integrated Urban Solutions: SGD 2,112 million (SGD 1.18 per share)
• Total Equity Value: SGD 12,302 million (SGD 6.89 per share)
• Post Discount Equity Value: SGD 11,072 million (SGD 6.20 per share)

Key Risks

Several risks could impact SCI’s performance, including lower wholesale energy prices in Singapore, higher natural gas prices, demand-supply imbalances in renewables, and increased capex requirements for transmission and storage. Policy changes, such as centralized natural gas purchasing in Singapore, also pose potential challenges.

Environmental, Social, and Governance (ESG) Highlights

Environmental Initiatives

• SCI aims to reduce greenhouse gas emissions intensity to 0.4 tCO2e/MWh by FY25. As of FY22, emissions intensity stood at 0.31 tCO2e/MWh, a significant improvement from 0.51 tCO2e/MWh in FY21.
• Gross installed renewable energy capacity has grown from 2.8GW in FY21 to over 10.3GW as of June 2022.

Social and Governance Framework

SCI is committed to robust corporate governance, with Temasek Holdings providing strong oversight. The company has also made strides in improving workplace safety, reducing injury rates, and enhancing employee training, with an average of 26.7 hours of training per employee in FY22.

Conclusion and Recommendation

Sembcorp Industries is well-positioned to capitalize on the global shift toward renewable energy while maintaining profitability through its conventional energy segment. With a robust strategy and substantial investments in sustainability, the company offers a compelling investment opportunity. Maybank Research maintains a “BUY” recommendation with a target price of SGD 6.20, emphasizing SCI’s long-term growth potential despite short-term challenges.