Sembcorp Industries (SCI) has been making strategic moves to optimize its portfolio and sharpen its focus on sustainable solutions. This detailed analysis dives deep into SCI’s recent divestments, acquisitions, and overall strategy to provide an engaging outlook for investors.
Recycling Capital
On Friday, SCI announced the sale of SembEnviro, a waste management services provider, for SGD405 million, marking a 43% premium over book value. The proceeds from this sale are earmarked for further investment in the energy business, aligning with SCI’s 2028 strategic roadmap. This divestment is expected to result in mid-single digit earnings accretion due to divestment gains and financial cost savings from debt repayment.
Waste to Energy
A wholly owned subsidiary of PT TBS Energi Utama will acquire 100% of the business from SCI. This sale, conducted on a “willing buyer, willing seller” basis, will help expand the buyer’s regional waste management platform in Indonesia and Singapore as it aims to enhance its green business portfolio. SCI plans to use the proceeds to drive its growth in the energy sector and support energy transition.
Aligning with Strategic Targets
Earlier, SCI proposed purchasing a 30% stake in local power producer, Senoko Energy. Part of the proceeds from the SembEnviro sale may be used to finance this purchase. Based on pro-forma disclosures, this transaction will be 3.4% accretive to Net Tangible Assets (NTA) and 13.4% to Earnings Per Share (EPS). This includes a divestment gain of SGD114 million. Excluding these gains and considering financing savings, earnings accretion is estimated at around 4-5%.
Additionally, SCI announced the cessation of the public cleaning contract for the Central-North region from the end of September 2024. The proposed sale should mitigate any adverse business impact from the non-renewal of this contract.
Maintain BUY
Despite higher yields and uncertainties over energy transition policies, SCI’s steady execution of its strategy and fair stock valuation lead us to maintain our BUY rating. The company’s valuation at 10x FY25E PE and 1.5x PB is below the historical mean (10.7x and 1.9x respectively). The healthy growth of monthly peak electricity demand year-to-date at 3.7% year-on-year—the highest since 2011, excluding the 2021 reopening—is beneficial.
Company Description
Sembcorp Industries is a conglomerate providing utilities services, sustainable solutions, and urban development. The company has a significant market capitalization of SGD9.0 billion (approximately USD6.7 billion) and a free float of 50.0%. Major shareholders include Temasek Holdings (49.5%), Citibank Nominees Singapore Pte Ltd (10.5%), and Raffles Nominees (Pte) Limited (5.3%).
Financial Metrics
SCI reported revenue of SGD7,042 million in FY23, which is expected to decline slightly over the next few years, reaching SGD6,470 million by FY26. EBITDA is projected to be stable at around SGD1,421 to SGD1,451 million over the same period. Core net profit is expected to fall slightly from SGD970 million in FY23 to SGD911 million in FY25, before recovering to SGD998 million in FY26.
The company’s net dividend yield is projected to remain steady at 2.4%, with core FD P/E ratios fluctuating between 9.0x and 9.9x. The net gearing ratio is expected to improve significantly from 134.5% in FY23 to 63.5% by FY26.
Value Proposition
Sembcorp Industries is Singapore’s leading sustainable solutions provider with approximately 14GW of capacity in renewables and over 12,000 hectares of project portfolio across Asia. Temasek’s 49.5% ownership offers SCI strong backing and helps secure attractive financing terms when bidding for projects globally.
SCI aims to increase sustainable solutions to 70% of net profit by FY25, ramp up installed renewables to 10GW, and develop sustainable urban solutions to 500 hectares. The company’s portfolio scale and diversity differentiate it from other power generation companies in Singapore in terms of reliability, flexibility, and its comprehensive ability to offer energy, urban, and water solutions.
Price Drivers
Key historical share price drivers include:
- Material impairments of SGD245 million in 4Q19 financial statements.
- Announcement of a joint project with Singapore Public Utilities Board to build one of the world’s largest inland floating PV systems at Tengah reservoir.
- Acquisition of a 98% stake in a portfolio of operational wind and PV assets in China, followed by the purchase of 35% of SDIC New Energy in December 2021.
- Peak wholesale power prices in Singapore.
- News on excess renewable supply in China and higher curtailment rates.
Swing Factors
Potential swing factors for SCI’s performance include:
Upside
- Stronger-than-expected order wins from key sectors.
- Improved margins due to continued cost controls and economies of scale.
- Higher dividend payout due to better earnings and/or cash flow outlook.
Downside
- Sharp reduction in energy prices.
- Slower contract wins resulting in a lower order book.
- Unexpected margin pressure from rising raw material and labor costs.
- Execution missteps leading to project delays or contract terminations.
Business Model & Industry Issues
Sembcorp Industries aims to transform its portfolio towards a greener future and become a leading provider of sustainable solutions. To achieve this, SCI targets to increase group net profit contribution from sustainable solutions to 70% by FY25. This involves:
- Increasing gross installed renewable energy (RE) capacity to 10GW.
- Tripling land sales to 500 hectares by providing a full suite of sustainable urban solutions.
- Reducing GHG emission intensity by 25% to 0.40 tonnes of carbon dioxide equivalent per megawatt hour.
Material Environmental Issues
SCI aims to reduce GHG emission intensity by 25% to 0.4 tonnes of carbon dioxide equivalent per megawatt hour by FY25. In FY22, the GHG emission intensity was 0.31tCO2e/MWh compared to 0.51tCO2e/MWh in FY21.
Gross installed RE capacity comprising wind, solar, and energy storage assets grew significantly from 2.8GW in FY21 to over 10.3GW as of June 2022. SCI’s global energy portfolio mix stands at 54% conventional energy, 45% renewables, and 1% energy-from-waste.
SCI generated 2.7 million tonnes of waste in FY22, a 13% increase from the previous year due to higher electricity production of thermal plants in India. 95% of non-hazardous waste was recycled into bricks and cement, which were used in construction.
Key Governance Metrics
Temasek Holdings is SCI’s substantial shareholder and SCI is committed to sound corporate governance practices. The company is led by a 9-member board, including Chairman Tow Heng Tan and Group President & CEO Wong Kim Yin. The average tenure of the independent directors is 5-13 years, with one woman on the board.
The board largely comprises independent non-executive directors who provide sound leadership to management. SCI has a track record of no legal actions in relation to anti-competitive behaviour or violations of anti-trust and monopoly legislation, and no reported cases of bribery and corruption in 2021.
Material Social Issues
SCI has made efforts to reduce workspace incidents, resulting in lower lost time injury rates and total recordable injury rates from FY21. Employee turnover decreased to 13.3% in FY22 from 15.7% in FY21. Each employee received an average of 26.7 hours of training in FY22, with 31% focused on sustainability skills.
Valuation
SCI is valued using a sum-of-the-parts method with a 10% holding company discount. A P/E of 10x is applied for gas & related services and renewables. The revenue for gas-related business and urban solutions is adjusted higher, with slightly lower interest costs.
| Basis |
Effective Value (SGD m) |
Per Share (SGD) |
| Conventional Energy |
10x FY24E PE |
7,619 |
4.27 |
| Renewables |
10x FY24E PE |
3,072 |
1.72 |
| Integrated Urban Solution |
NAV, 1H24 |
2,112 |
1.18 |
| Decarbonization Solutions |
NAV, 1H24 |
30 |
0.02 |
| Other business / Corporate |
NAV, 1H24 |
(1,411) |
(0.79) |
| Total Equity Value |
– |
11,422 |
6.40 |
| Post 10% Conglomerate Discount |
– |
10,280 |
– |
| Diluted No. of Shares |
– |
1,785 |
– |
| Value Per Share (SGD) |
– |
6.0 |
– |
Risks
Risks to SCI’s valuation include lower wholesale energy prices in Singapore, higher natural gas prices, and demand-supply imbalance of renewable energy in China and India, leading to lower capacity utilization factors. Other risks include the implementation of centralized natural gas purchase for power generation in Singapore and higher capex for transmission and storage, especially for renewables.
Financial Statements
Key metrics for SCI over the next few years include:
Income Statement
| FY22A |
FY23A |
FY24E |
FY25E |
FY26E |
| Revenue |
7,825.0 |
7,042.0 |
6,723.6 |
6,468.3 |
6,470.3 |
| EBITDA |
1,189.0 |
1,604.3 |
1,446.4 |
1,420.9 |
1,451.2 |
| Depreciation |
(461.0) |
(463.3) |
(467.9) |
(467.9) |
(472.6) |
| EBIT |
728.0 |
1,141.0 |
978.4 |
953.0 |
978.6 |
| Net Interest Income/(Expense) |
(273.0) |
(352.0) |
(330.7) |
(340.7) |
(284.0) |
| Associates & JV |
248.0 |
264.0 |
313.5 |
328.4 |
345.4 |
| Other Pretax Income |
162.0 |
177.0 |
158.9 |
142.6 |
127.7 |
| Pretax Profit |
865.0 |
1,230.0 |
1,120.1 |
1,083.3 |
1,167.7 |
| Income Tax |
(138.0) |
(182.0) |
(143.1) |
(176.3) |
(176.3) |
| Minorities |
(23.0) |
(28.0) |
(20.0) |
(20.0) |
(20.0) |
| Reported Net Profit |
871.0 |
970.0 |
942.6 |
910.5 |
998.5 |
| Core Net Profit |
871.0 |
970.0 |
942.6 |
910.5 |
998.5 |
Balance Sheet
