Sembcorp Industries - Renewables Proxy in Singapore

Date: 27/05/2021

Source  :  CIMB
Stock  :  Sembcorp Ind       Price Target  :  2.43      |      Price Call  :  BUY
        Last Price  :  2.11      |      Upside/Downside  :  +0.32 (15.17%)

  • Sembcorp Industries aims to grow renewable energy profit by 30% (5-year CAGR) by 2025F from S$46m in FY2020. ROE target: 10%. No more investment in coal power.
  • Sembcorp Industries targets to grow its renewable energy installed capacity to 10GW from current 2.6GW. The target is higher than Philippines peer ACEN (5GW).
  • We are positive on Sembcorp Industries’s renewables commitment, but execution is key. Assuming a blue-sky scenario, Sembcorp Industries’s profit could reach S$397m by FY25F.
  • We now value Sembcorp Industries based on 15x FY22F P/E, in line with Asian peers, to derive a higher target price of S$2.43. Reiterate ADD.

Renewable Energy Profit S$170m by 2025F on 5-year CAGR of 30%

  • We are positive on Sembcorp Industries (SGX:U96)’s plan, as shared during its investor day, to grow the profit contribution from its sustainable solutions portfolio from a current 40% to 70% by 2025F. The portfolio comprises a renewable energy portfolio (target CAGR: 30%) and an integrated urban solutions portfolio (target CAGR: 10%).
  • Sembcorp Industries plans to cut greenhouse gas (GHG) emissions by 90% to 2.7mtCO2e by 2030F, from a current 26.5mtCO2e. It said it will not make any more investment in coal energy, and we do not rule out potential divestment of some thermal assets (read: India). Along with this, Sembcorp Industries aims to quadruple its gross installed renewable energy capacity to 10GW from 2.6GW (comprising wind, solar and energy storage); this could bring its renewable energy profit (mainly wind power in India and China, as well as battery storage in UK) from S$46m in FY20 to S$170m in FY25F.
  • Sembcorp Industries also targets a 5-year profit CAGR of 10% for its integrated urban solutions (urban, water, waste and waste-to-resource) from S$113m in FY20.

Ambitious Investment of S$4.4bn for Renewables

  • We think Sembcorp Industries is aggressive to set bidding/greenfield opportunities in Southeast Asia, India and China. Funding needs will be done via green financing and divestments of mature assets. EFR risk is low.

Net Profit Could Reach S$397m by 2025F; ADD, Target Price Up to S$2.43

  • The focus on renewables is an attractive investment thesis for long-term investors, but execution is a blue-sky scenario and yield a long-term target price of S$3.33 (based on 15x P/E).

Group ROE of 10% Achievable With Integrated Urban Solutions

  • Management shared on the ROE and lifecycle of its pure help of divestment and integrated urban solutions ( > 10%).

No More Coal Investment; We Do Not Rule Out Divestments in Future

  • In the longer term, Sembcorp Industries plans to deliver net-zero emissions by 2050 via unexpected shutdown of assets and unfavourable regulatory changes.
  • Consistent earnings growth is catalyst.

Source: CGS-CIMB Research - 27 May 2021

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