Sembcorp Industries: Staying the Course

Broker: Maybank Research Pte Ltd

Date of Report: March 4, 2025

Resilient Performance and Growth Prospects

Sembcorp Industries (SCI) showcased a resilient performance in the second half of FY24, reporting a PATMI of SGD471 million, reflecting a 13% decline HoH but a robust 14% growth YoY. For the full fiscal year, the company recorded a PATMI of SGD1.011 billion, marking a 7% increase YoY, while PATMI from continuing operations remained stable at SGD1.02 billion. The notable growth in earnings was attributed to higher gains in the gas and related services, as well as integrated urban solutions. In line with this performance, SCI raised its full-year dividend to 23 cents, up from 13 cents in FY23. The company is now guiding for a 5% earnings CAGR for its gas business, a significant shift from the previous guidance that anticipated a decline.

Revenue Breakdown and Business Performance

In FY24, SCI’s total revenue was SGD6.417 billion, representing a 9% decrease YoY. The gas business generated a net profit of SGD727 million, down 10% YoY, largely due to a 15% fall in segment revenue caused by planned maintenance downtime and a substantial 34% drop in wholesale power prices in Singapore. Meanwhile, the renewables segment faced a net profit of SGD183 million, which was a 9% decline YoY. This decline occurred despite a 6% growth in the top line, driven by a 40% increase in installed capacity to 13.1 GW, as higher curtailments in China and lower wind speeds in India impacted performance. The integrated urban solutions business, however, saw a 3% growth in top line and a 40% surge in net profit due to increased land sales in Vietnam and Indonesia.

Debt and Future Growth Initiatives

SCI’s debt metrics have softened, reflecting higher leverage to fund mergers and acquisitions and to expand operational power capacity. The company is now guiding for a 5% earnings CAGR for its gas business through 2028, driven by heightened energy security concerns and robust power demand. Furthermore, SCI has revised its renewables target upward to 35 GW, with a distribution of 15 GW across China and Southeast Asia, and 20 GW for India and the Middle East. Although no specific timeline has been provided, this target exceeds the previously set goal of 25 GW by 2028. The urban solutions segment is expected to maintain a profit CAGR of approximately 15% and a 10% ROE.

Investment Recommendation: Maintain BUY

Maybank Research has raised its earnings estimates for FY25-26 by 6-11% due to growth in the gas and urban solutions businesses, along with improved margins. The dividend per share forecast has also been adjusted to 23 cents. The recommendation to maintain a BUY rating is based on the robust earnings profile and long-term growth prospects stemming from SCI’s position as an energy infrastructure player in a rising demand market.

Share Price Performance and Valuation

The current share price stands at SGD6.32, with a revised 12-month price target of SGD7.10, indicating a potential upside of 12% from the current levels. This represents an increase from the previous price target of SGD6.20. The company is valued using a sum-of-the-parts method, where the effective value per share is calculated at SGD7.10 after accounting for a 15% conglomerate discount. The value comprises SGD10.735 billion from gas and related services, SGD3.237 billion from renewables, and SGD2.177 billion from integrated urban solutions. The net asset value for decarbonization solutions and other businesses is also considered.

Key Risks to Consider

Investors should be aware of several risks that could impact SCI’s performance, including lower wholesale energy prices in Singapore, a demand-supply imbalance for renewable energy in China and India, and potential policy changes that could impair renewables investments. Additional risks include the implementation of centralized natural gas purchases for power generation in Singapore and rising capital expenditures for transmission and storage, particularly in the renewables sector.

Conclusion

As a leading provider of sustainable solutions, Sembcorp Industries is on a transformative path to enhance its renewable capacity and urban development projects. With strong operational performance and a strategic focus on growth, the company is well-positioned to navigate the evolving energy landscape, making it a compelling investment opportunity.