<News Analysis> Investor Day 2023 – Three key takeaways
- Doubling in renewable capacity to 25GW by 2028, funded by OCF, debt and capital recycling; no equity fund raising required for the new goals
- Projecting +25% 6-year CAGR for Renewables while -2% for Conventional Energy in 2022-2028; implying 7.5% CAGR in group profit assuming steady urban solution earnings
- Uniquely positioned to drive energy transition through renewables and decarbonisation initiatives
- Reiterate BUY; TP S$7.15
What’s happening
5-year growth roadmap unveiled. During investor day 2023, Sembcorp Industries (SCI) shared their goals for next 5-year: 1) It plans to double renewable capacity from current 12GW to 25GW by 2028, with S$14bn estimated capex to be funded by operating cash flow (50%), project financing (30%) and corporate debt / capital recycling / partnerships (20%). Management emphasizes that there is no equity fund raising required to achieve the new goals, unless a very compelling and earnings accretive acquisition target requires equity issuance. Key market focus remain China, India, Singapore and other SEA countries like Vietnam and Indonesia. Unlike offshore wind in US/Europe that faces supply chain issues, onshore renewables in our region especially China and India are seeing improving fundamentals such as low interest rates & solar panel prices in China and quicker payment collection in India. 2) Back in hometown Singapore, SCI has also taken pre-emptive measures to lock in longer term PPAs for Singapore power since 3Q, leaving only 5% exposure to spot in 3Q. Hence, Singapore power earnings should be relatively steady with only slight h-o-h decline in 2H23, and more predictable going forward. 3) In terms of decarbonisation drive, SCI is uniquely positioned with various initiatives in place – low-carbon energy imports from Indonesia & Malaysia, potential ammonia production in India, retrofitting ammonia-ready power plant, carbon credit software & services etc
Our view
SCI has demonstrated excellent execution for its “brown-to-green” strategy during 2020-2023 and again another well though-through roadmap for next 5-years through 2028. The more predictable and steady Singapore power earnings ahead eliminates investors concern on earnings volatility while the conservative approach to self-funding the growth plan without equity fund raising also removes dilution risk overhang and provide upside growth potential. SCI targets to achieve at least 12% ROE (15% gas assets and 10% renewable), and projects +25% 6-year CAGR for Renewables while -2% for Conventional Energy in 2022-2028. We estimate that this implies c.7.5% CAGR in group profit in 2024-2028 assuming steady urban solution earnings and group earnings forecasts of S$900m in FY2024F. The group also plans to maintain 25% dividend payout ratio, translating to 13-17 Sct DPS or 2.5-3.5% dividend yield. Share price pullback from high of over S$6/share the past few months offers good buying opportunity. Valuation is undemanding at <10x FY24 PE and 1.6x PB. Reiterate BUY and TP S$7.15 (14x FY24F PE)
Full note on 5-year strategy plan to follow.
