Sembcorp Industries - Conventional Energy to lift 1H22 profits

21 Jul 2022
  • The average Uniform Singapore Energy Price (USEP) prices rose 239% YoY in 1H22 driven by the conflict in Ukraine. Spark spreads have increased as average USEP prices have moved ahead of high sulfur fuel oil (HSFO) in the last nine months. Tariffs for power in Tamil Nadu and Gujarat in India also rose ~88% YoY as higher temperatures in the country drove up power demand.
  • Sembcorp Industries (SCI) gross renewables capacity in operation and under development globally now stands at 6.8GW in 1H22 from 6.1GW as at end-2021. This is ahead of our FY22e target of 7.3GW. Accordingly, we revise our FY22e capacity to 7.6GW on account of the Group’s aggressive buildup of its renewables portfolio.
  • We downgrade to NEUTRAL from ACCUMULATE with a higher target price of $2.96 (prev. $2.94). We raise FY22e PATMI by 6% as we bake in higher profits from Conventional Energy and Renewable Energy for FY22. Our target price is raised to $2.96, still based on 1.2x FY22e P/BV, the average of its peers. But we downgrade to Neutral after the recent run-up in its price.

 

 

The news

SCI financial results are expected to be materially higher for 1H22 vs. last year, driven by the Conventional Energy segment.

Contrary to a report that Myanmar’s central bank has ordered a halt on repayment of foreign loans, its subsidiary in Myanmar has not received such a directive. It has also received prompt payment from its offtaker and continues to operate its Myanmar power plant.

 

The Positives

+ Average USEP prices up 239% YoY or 9.8% HoH to lift SCI’s 1H22 Conventional Energy. The global energy crunch since September 2021 lifted SCI’s Conventional Energy segment in 2H21. The conflict in Ukraine at the beginning of the year has further exacerbated the risk of disruptions in oil and gas. As a result, average USEP prices for 1H22 surged to S$324/MWh, higher than the S$295/MWh average in 2H21 and spark spreads have increased to 6.3 YTD (Figure 1) as average USEP prices have moved ahead of HSFO in the last nine months.

 

+ Tariffs for power in India’s Tamil Nadu and Gujarat rose ~88% YoY in 1H22. Based on data from IEX, tariffs for power at Tamil Nadu and Gujarat rose to ~6.36Rs/kWh from ~3.39Rs/kWh from the same period last year. The higher tariff was driven by high global oil prices and higher temperatures in the country. The International Energy Agency (IEA) recently revised upward India’s electricity demand to 7% from negative previously in light of the intense heatwave in the country.

 

On the back of this, we revise FY22e Conventional Energy revenue up marginally from $8.6bn to $8.8bn to account for better spark spreads for Sembcorp Cogen and India (Figure 3).

 

+ On track to building up its green energy portfolio. SCI’s gross renewables capacity in operation and under development globally now stands at 6.8GW in 1H22 from 6.1GW as at end-2021 (Figure 2). This is ahead of our FY22e target of 7.3GW, accordingly, we revise our FY22e gross renewables capacity to 7.6GW on account of the Group’s aggressive build up of its renewables portfolio. We believe the company is on track to achieve its plans of increasing its renewable capacity to 10GW by 2025. We see the company’s transition toward green energy as an important driver of its re-rating.

 

The Negatives

– Headwinds in China property market to put a drag on Group’s Urban development business. China’s property market has weakened sharply in the past year as a result of a government clampdown on excessive borrowings by developers, and a Covid-19 induced economic slowdown (Figure 4). We believe this will hurt the Group’s land sales in China, though the impact is not expected to be significant as China account for just 6% of the Group’s total saleable land.

 

 

Outlook

We expect the group to continue with its transition to sustainable solutions and sustainable development. Despite its ambitious growth plans, it will not require any equity fund-raising, relying entirely on internal sources.

The Conventional Energy segment continued to perform well in the first half of this year as global energy markets rose in tandem with commodity prices. For the rest of 2022, we expect this segment to be supported by energy markets and the continued uncertainty brought about by the Ukraine conflict.

However, we expect the slowdown in the Chinese property market to offset some of the growth from the Conventional Energy and Renewable Energy segment.

The Group continues to actively seek deals in India, China and the UK by leveraging its partnerships and platforms for their acquisitions.

About the author

Terence Chua
Senior Research Analyst
Phillip Securities Research

Terence specialises in the consumer, conglomerate and industrials sector. He has over five years of experience as an analyst in the buy- and sell-side. As an institutional fund management analyst, he sat on the China-Hong Kong desk. Terence was ranked top 3 for Best Analyst under the small caps and energy category in the Asia Money poll 2018.

He graduated from the Singapore Management University with a major in Finance (Honours), and is the honoured recipient of the CFA scholarship.

Latest Reports

Contact us to Open an Account

Need Assistance? Share your Details and we’ll get back to you

IMPORTANT INFORMATION

This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

This advertisement has not been reviewed by the Monetary Authority of Singapore.  

 

Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com