Sembcorp Industries – Optimised performance

Excerpts from Maybank report

Sembcorp Industries Ltd (SGX: U96)

Navigating lower power prices and China weakness

• Sembcorp Industries 1H PATMI of SGD540m +31% HoH/-11% YoY. Top line and bottom line declined by low teens due to lower gas offtake and gas prices, lower power prices in Singapore and demand-supply imbalance in China.
• This was partly offset by higher land sales and nimble execution of its contracting strategy. Management raised its Vietnam and Indonesia industrial land sales target.
• Notwithstanding higher gearing, 1H dividend rose to 6c (5c 1HFY23). While near-term uncertainty prevails, SCI is executing its energy transition strategy well.

We apply a lower PE multiple and cut our SOTP based TP to SGD5.50, but maintain BUY.

Contracted power portfolio provides resilience

Sembcorp Industries posted 1H revenue and PATMI before exceptional items of SGD3.2b and SGD532m, down 12% YoY. Group net profit after exceptional items and discontinued operation was SGD540m, +2% YoY. Lower turnover resulted from the aforementioned reasons. Net profit for gas and related services was SGD339m, -22% YoY, due to planned maintenance of its Singapore power plant and lower revenue, mitigated by portfolio optimization. Profit from renewables fell 13% YoY to SGD104m due to higher curtailment rates in China and lower profitability in the UK. Weakness in the key business segments was partly offset by higher land sales and other businesses.

Focusing on land sales in Indonesia and Vietnam

Management revealed an intensified focus on industrial park rental income and Indonesia and Vietnam land sales while managing its existing China portfolio for value. By 2028, Vietnam is expected to account for half of equity investments, shifting the mix away from China. RoE is expected to grow to 10% from 6%. The 2H outlook is relatively better. Completion of the maintenance in SG and significantly contracted revenue stream should see higher earnings for gas and related services. This will be partly offset by weaker renewables due to seasonality and weak China macro.

Valuation/Recommendation

Applying a lower PE multiple, maintain BUY. We leave FY24 and FY25 forecasts relatively unchanged as we factor in slower ramp up of renewables earnings, offset by less steep fall in earnings from gas and related services due to the group’s contracting strategy. However, we apply a lower PE multiple of 10x (vs. 12x) due to demandsupply imbalance in China renewables and the evolving energy landscape in Singapore. In the long term, SCI is the prime beneficiary of the shift to clean energy. Maintain BUY with a lower TP of SGD5.50 Sembcorp Industries share price chart You can find the full report here and the company website here.