Sembcorp Industries (SCI SP): Small Storms In A Teacup
UOB Kay Hian | 17 March 2025
We strongly believe that the share price decline on SCI’s double whammy of negative news from Vietnam and Indonesia last week presents a buying opportunity for investors. SCI’s exposure to Vietnam renewables is only 3% of its attributable capacity and, more importantly, the cancellation of the Indonesian GSA is a non-event given that SCI can source for alternative LNG and should costs be higher, contract terms allow such costs to be passed on. Maintain BUY. Target price: S\$8.00.
What’s New
Share price downdraft presents a buying opportunity
Last week’s negative newsflow surrounding Sembcorp Industries’ (SCI) Vietnam renewables and Singapore conventional energy led to a share price decline of 5.4% wow and the fourth worst performer in our Singapore stock coverage. In our view, this presents a buying opportunity as: a) its exposure to Vietnamese renewables is only 3% of its total attributable capacity, and b) the cancellation of the Gas Sales Agreement (GSA) only affects gas supply from 2027 onwards and the company should be able to make up for the shortfall via more LNG imports.
Tariff troubles in Vietnam
Last week, Vietnam signalled its intention to retroactively alter power purchase agreements for renewables. While this policy shift is aimed at reducing losses suffered by Vietnam’s state-owned power utility EVN, the government’s move to replace fixed feed-in tariffs with a competitive bidding mechanism has created uncertainty and raised questions about the future of renewable energy investments in Vietnam. We highlight that SCI’s exposure to Vietnamese renewables is relatively small, accounting for only 3% of the company’s attributable installed and under-construction capacity.
Unconcerned about the cancellation of an Indonesian GSA
Due to the very strong growth in domestic demand for gas in Indonesia, the Indonesian Ministry of Energy & Mineral Resources has directed that all of the gas within the Mako field has to be sold to Indonesia’s state-owned electric utility PLN from its start-up in 2027. As a result, SCI had to cancel its GSA with the owners of the Mako gas field, and the company will have to continue to rely on its existing pipeline gas and LNG instead. We do not see this as an issue given that SCI is able to pass on costs to its customers in the event of higher gas prices. From a bigger picture perspective, gas supply via pipeline vs LNG would have presented greater energy security for Singapore.
Stock Impact
Storm in a teacup
Assuming that Mako’s pipeline gas is sold at a 15% discount to the Indonesian Crude Oil Price (ICP), Japan’s LNG prices would have seen an average premium of 12% compared with Mako’s pipeline gas over the past 10 years. We highlight that this is purely an illustration of the premium that LNG may command over pipeline gas, and that LNG prices have sometimes traded at a discount to pipeline gas prices. As stated earlier, the pricing mechanism within its contracts allows SCI to fully pass on gas costs to the customer.
On a more positive note, there is an expansion of IUS footprint in Vietnam
Last week, SCI announced that, together with its long-time partner, Vietnam’s state-owned Becamex IDC, it will develop two new Vietnam Singapore Industrial Parks (VSIP) in Nam Dinh and Nghe An provinces, bringing the total number of VSIPs in the country to 20. These projects align with Vietnam’s push for sustainable and high-tech industrial growth, and will be developed as low-carbon industrial parks. Importantly, these two new projects strengthen SCI’s presence in Vietnam. Recall that during its 2024 results briefing, management stated that in the medium term, it targets to grow the integrated urban solution’s earnings by mid-teens CAGR and for it to generate more than 10% ROE. In 2024, the integrated urban solutions (IUS) segment had the highest growth rate among all of the company’s business segments.
Needless to say, dividends will be sustainable despite recent negative newsflow
Recall that during its 2024 results, SCI raised its payout ratio to 40% which is a material increase from the average payout ratio of 29% over 2021-23. At the time, management emphasised that this higher payout was sustainable in the foreseeable future and underscored its belief in the strong cash generation ability of all of its business segments. We do not believe that anything has changed in the past week and the 40% payout ratio remains intact, resulting in a prospective yield of 4.3% for 2025.
Re-starting its share buyback programme
We note that after SCI’s 2024 results, the company has restarted its share buyback programme with S\$2.9m spent on 13 March at an average price of S\$6.04/share. Prior to its results, the company had bought S\$20.7m worth of shares at an aggregate price of S\$5.58/share.
Earnings Revision/Risk
No changes to our earnings estimates.
Valuation/Recommendation
Maintain BUY with an unchanged PE-based target price of S\$8.00. We use a target PE multiple of 12.6x which is 1.5SD above the company’s 2018-25 average PE of 8.2x (excluding 2020 where the company reported impairment-related losses) which is then pegged to our 2025 EPS.
Share Price Catalyst
- Execution of its renewables energy targets via organic and inorganic means.
- Delivering its 600MW hydrogen-ready co-generation plant in Singapore on time and within budget.
- Capital recycling in its energy portfolio.
