Setting 2028F targets
- SCI announced a 5-year S$14bn investment plan across renewables, decarbonisation solutions, hydrogen-ready assets and urban solutions.
- 75% of the investments, or c.S$10.5bn, will be used to grow its renewable energy (RE) installed capacity to 25GW by 2028F (from 8.7GW currently).
- The group expects RE net profit (before EI) to grow at 25% CAGR in 2022- 2028F and targets 2028F RE ROE at 10% (overall ROE: 12%).
- Reiterate Add, with an unchanged TP of S$6.85, based on 14x CY23F P/E.
RE installed capacity to nearly triple by 2028F
At its Investor Day, Sembcorp Industries (SCI) presented its 2028F target to reach 25GW gross renewable energy (RE) installed capacity, up from the current level of 8.7GW. Including projects under development, SCI has c.12GW of RE capacity in its portfolio, 53% of which comes from wind (6.3GW), 39% from solar (4.7GW), and 8% from energy storage (909 MWh). With a target c.50% mix for solar, SCI implies it will need to add c.7.8GW of capacity through solar projects by 2028F. New RE capacity is expected to primarily come from projects in India, Singapore, Vietnam, Indonesia, the UK and the Middle East, thus reducing its portfolio exposure to China from 62% as of 30 Sep 2023 to c.45%. SCI aims to reduce its emissions intensity to 0.15tCO2e/MWh (from 0.30tCO2e/MWh in 2023F).
S$14bn investment plan
Of the S$14bn SCI plans to invest over 2024-28F, S$10.5bn would be directed towards building RE capacity. Other areas of investment are decarbonisation solutions, including RE imports (S$1.4bn) and integrated urban solutions (S$0.7bn). SCI intends to fund these investments through operating cash flows (50%), project debt (30%), corporate debt (10%) and capital recycling (10%). Management’s estimate of c.S$1.8bn p.a. of operational cash flows (including interest expenses) is supported by a stable income stream coming from a 97% contracted gas portfolio (52% long-term contracts of >5 years).
Based on management’s guidance for annual net profit (before EI) CAGR of 25% for RE and -2% for conventional energy (CE) in 2022-2028F, along with its planned financing structure (as above), our preliminary calculations show that its overall ROE target of 12% by 2028F (RE: 10%, CE: 15%) appears achievable. That said, management noted that it would be willing to take on additional debt if it is unable to meet its capital recycling target; in our view, the additional debt would have a marginal impact on its net gearing ratio (138% as of end-2022) based on the assumed capital recycling amount of c.S$1.4bn. SCI said that it does not plan to raise any new equity to meet the investment requirements.
Reiterate Add, with an unchanged TP of S$6.85
We reiterate our Add call with an unchanged TP of S$6.85, based on 14x FY23F P/E. Our current estimates have not included any potential accretion from the planned new investments. Re-rating catalysts: stronger-than-expected CE profits and sizeable earnings accretive RE M&As. Downside risks: prolonged unplanned shutdowns of assets, and unfavourable regulatory changes impacting its operations and earnings.