Utilities Exceed Expectation
- Sembcorp Industries (SGX:U96)'s 1H22 net profit of S$490m (+94% y-o-y, +110% q-o-q) exceeded MIBG and consensus estimates (95%/96%) due to all-around solid performances from conventional (+115% y-o-y), renewable energy (+217% y-o-y) and stable integrated urban solutions (-2% y-o-y).
- We raise our FY22-24E profit forecast for Sembcorp Industries by 76- 82% as we anticipate earnings outperformance to accelerate in 2HFY22.
- Heightened spark spreads in Singapore and India coupled with full year earnings from its newly acquired renewable portfolio in China presents an excellent opportunity to accumulate after pullback, in our view.
- Reiterate BUY call on Sembcorp Industries with a raised SOTP-based target price of S$4.50 (from S$3.40), or 47% upside.
Greener and Stronger
- Net profit for the renewables segment rose to S$76m (+138% q-o-q) in 1H22. Strong contributions came from associates and JVs like SDIC New Energy (S$23m) and Shenzhen Huiyang New Energy (S$7m) in China, acquired in Jan22 and Jun22, respectively.
- Performance also benefitted from new wind resources in India and increased contribution from solar operations in Singapore.
- Including the 0.9GW of renewables projects secured in 1H22, Sembcorp Industries's gross renewables capacity (installed and under development) totalled 7.1GW, well ahead of its 10GW 2025 target.
Conventional Energy Continues to Shine
- The segment swung to net profit of S$397m (+98% q-o-q) before exceptional items in 1H22, mainly due to higher electricity tariffs; USEP (+242% y-o-y) and IEX (+58% y-o-y), as power prices around the world soared on supply worries following major oil producer Russia's invasion of Ukraine. The boom was further aided by realised gains from favourable gas hedges and other income (SDG92m) in Singapore operations.
- We think that the catalyst in this segment is divestment of SEIL’s thermal power plants with profits replaced by earnings from renewable energy capacity expansion.
Outlook Remains Rosy
- Electricity price hikes in Singapore and India are likely to continue amid rising input costs and gas production outages. As such, we project Conventional Energy (+25% y-o-y) underlying earnings to stay resilient in 2H22 and Renewables (+30% y-o-y) to be boosted by full year performance of its recent China portfolio acquisition.
- Sembcorp Industries declared an interim dividend of S$0.04 (+60% y-o-y) which exceeded expectations. We think that management will mark this outperformance with a special dividend in FY22.
- Key risks are global inflationary concerns with rising interest rates/borrowing costs in China which would hurt margins and prolonged shutdowns of the SEIL P2 or Biomass Power station in UK.
Source: Maybank Research - 8 Aug 2022
