Sembcorp Industries Ltd: Powering Growth and Yield
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FY24 results ahead with dividend surprise. SCI reported strong FY24 results with core net profit of SGD1.02bn (flat y/y), 5% ahead of ours and consensus’ estimates. The steady performance despite a major plant shutdown for maintenance in 2Q24 (loss of income of ~SGD50mn) is commendable. Integrated Urban Solutions was the star performer in FY24, posting 34% y/y growth in net profit to SGD172mn on strong land sales, offsetting the weakness in renewable segment due to higher curtailment rate in China, lower wind speed in India and impairment on receivables of SGD19mn. Results were also aided by a forex gain of SGD10mn for the SEIL Deferred Payment Note (DPN) vs expectations of a small loss of SGD30-40mn Management raised the dividend payout to 40% (from 20-25% previously) for FY24 to reward shareholders with higher yield. The final DPS of 17 Scts brings the full year payout to 23 Scts, implying c.4% yield.
Gas & Related Services growth outlook lifted, new growth markets for Renewable. During the briefing, management also shared their reorganisation strategy to accelerate growth, with appointment of key Presidents & CEOs for the three key business lines. Earnings growth target for Gas & Related Services segment was raised to >5% CAGR during 2022-2028 (from -2% CAGR previously) considering the earnings accretion from Senoko acquisition, steady earnings for Singapore power assets and potential organic growth / acquisition opportunities.
The current CEO of China Renewables will drive expansion into the markets in SEA in particularly Indonesia, Vietnam and Philippines.
Potential Capital Recycling? The time looks ripe for securitisation of India renewable assets. The India renewable portfolio has grown to a good size of 5.5GW capacity (~2.8GW gross installed capacity and 2.7GW of project pipeline under construction). Furthermore, has also been resolved with the government’s stricter enforcement of rules, leading to a healthier renewable market in China.
Raised forecasts and TP. We have raised our FY25-26F earnings marginally by 2-3% to reflect the stronger growth of Gas & Related Services and Integrated Urban Solutions, partially offset by slower renewable growth. This excludes the potential SembCorp Environment divestment gains of >SGD100mn that is expected to be recognised in 1H25 upon completion of transaction. We are raising our TP to SGD8 on higher FY25 earnings and a PE multiple of 13x (12x previously) in view of the brighter growth prospects. Trading at 9.5x PE and 1.7x PB, SCI’s valuation remains undemanding, at a 10-30% discount to peers.
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DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR.