Date: September 18, 2024
Broker: Maybank Research Pte Ltd
Overview
Sembcorp Industries (SCI) is a leading energy and urban solutions provider headquartered in Singapore. The company focuses on providing sustainable solutions and utilities services, including power generation and urban development projects across Asia. As of FY23, SCI’s portfolio included 14GW of renewable energy capacity and over 12,000 hectares of urban development projects.
Key Business Segments
- Gas & Related Services
SCI generates a significant portion of its revenue from gas and related services. This segment includes power generation through conventional energy sources such as gas-fired power plants. SCI has a balanced energy portfolio, which includes 18.5GW of total capacity, of which 54% comes from conventional energy sources.
- Renewables
SCI has been aggressively growing its renewables portfolio. As of June 2022, the company’s renewable energy capacity had grown from 2.8GW to over 10.3GW, excluding acquisitions pending completion. SCI aims to increase its installed renewables capacity to 10GW by FY25E and shift its net profit contribution from sustainable solutions to 70%.
- Urban Development
SCI is also involved in integrated urban development, transforming raw land into sustainable urban developments. The company’s urban project portfolio spans over 12,000 hectares across Asia.
Recent Strategic Acquisition: Stake in Senoko Energy
SCI recently agreed to acquire a 30% stake in Senoko Energy from Engie SA, marking a strategic expansion in Singapore’s energy market. This acquisition will deepen SCI’s footprint in the energy sector, enhancing its market share and providing access to piped gas imports.
- Senoko Energy Overview:
Senoko Energy operates a 2.8GW combined cycle gas turbine (CCGT) plant in Woodlands, which accounts for 21.7% of Singapore’s total installed power generation capacity. Senoko also contributes to 15.4% of Singapore’s generated electricity. It is one of the four licensed importers and retailers of piped natural gas in Singapore, previously importing gas from Malaysia.
- Financial Impact:
SCI estimates the acquisition will be accretive, contributing approximately SGD65 million to SCI’s FY24E earnings. Senoko had been loss-making until 2021, but it turned profitable in 2022, generating SGD178 million in profit and SGD511 million in 2023. The acquisition is expected to enhance SCI’s market share, increasing its generated electricity market share in Singapore to 15%.
- Funding:
The acquisition will be financed through a mix of internal resources and debt. SCI has estimated a 5% funding cost for the acquisition, which is expected to increase the company’s gearing by 2 percentage points.
Financial Performance
- Revenue and Profitability
- In FY22, SCI reported a revenue of SGD7.8 billion, which decreased to SGD7.0 billion in FY23. SCI’s FY24E revenue is forecasted to be SGD6.7 billion.
- SCI’s core net profit for FY23 was SGD970 million, and it is expected to fall slightly to SGD943 million in FY24E due to lower power prices in Singapore.
- EBITDA for FY24E is projected at SGD1.45 billion, down from SGD1.60 billion in FY23.
- Earnings Growth
While SCI’s revenue and core profit are expected to fall in FY24E due to lower energy prices, the company’s revenue from gas sales and urban solutions is projected to increase, supported by its diversified business model. The long-term shift toward renewables is expected to enhance profitability.
- Dividends and Valuation
- SCI’s core FD P/E ratio is estimated at 9.9x for FY23 and 10.1x for FY24E.
- SCI offers a dividend yield of approximately 2.4% for FY23 and FY24E.
Strategic Goals and Future Outlook
- Sustainability Goals
SCI is committed to a sustainable future by shifting its energy portfolio from conventional sources to renewable energy. The company targets to increase gross renewable energy capacity to 10GW and develop 500 hectares of sustainable urban solutions by FY25E. Additionally, SCI aims to reduce greenhouse gas emissions by 25% to 0.40 tonnes of CO2 per megawatt hour.
- Market Positioning
SCI is well-positioned as Singapore’s leading sustainable solutions provider. Temasek Holdings, which owns 49.5% of SCI, offers significant backing and helps the company secure financing for global projects. SCI’s portfolio scale and diversity in energy and urban solutions differentiate it from other power generation companies in the region.
- Challenges and Risks
Potential risks include lower wholesale energy prices in Singapore, higher natural gas prices, and demand-supply imbalances in renewable energy markets such as China and India. Additionally, the implementation of centralized natural gas purchase policies for power generation in Singapore could increase SCI’s operating costs.
Conclusion
SCI’s strategic acquisition of a 30% stake in Senoko Energy and its strong focus on renewable energy and urban solutions underscore its long-term growth potential. Despite near-term challenges such as falling power prices, SCI is well-positioned to benefit from the global shift toward sustainable energy, supported by its diversified business model and strong financial backing. The company remains a key player in Singapore’s energy and urban development sectors, with a promising outlook for future growth.
