Igniting the renewable spark
- FY23 core profit of S$1bn slightly above expectations, thanks to strong Singapore power earnings
- Renewable segment saw 42% y-o-y jump in net profit; sustainable solutions contributed to c.30% of group profit
- Renewable installed capacity to rise 28% in 2024; mitigates impact of 60-day scheduled maintenance of Singapore power plants in 1H24
- Declared 8 Sct final dividend, translating to over 2% dividend yield; reiterate BUY and TP S$7.15
Record profit in FY23
A steady 2H23. SCI’s FY23 core profit (excl. SEIL divestment loss of S$78m) of S$1bn is 5% above our estimate. The outperformance was attributable to stronger-than-expected gas & related services, especially Singapore power. Net profit for the gas segment was down a slight S$60m or c.15% h-o-h to S$374m in 2H23, despite a sharp decline in the Uniform Singapore Energy Price (USEP), as the group shifted away from the volatile merchant market.
Gas and related services were the star performer. Gas segment contributed S$809m (+34% y-o-y) in net profit in FY23, making up c.72% of group profit. Of this, c.80% came from the Singapore power business.
The steady 2H23 gas earnings, down by a slight 15% h-o-h to S$374m, despite the much steeper decline of 45% in the USEP, vindicates management’s guidance of more predictable and steady power earnings ahead, with measures in place to mitigate merchant risk.
This includes: 1) >95% contraction of capacity from 2H23 (average tenure of 12 years), lifted from two-thirds previously, with the commencement of long-term PPAs with Micron (18-year PPA to supply up to 450MW of power, with 350MW starting in 2H23); Singtel (10-year PPA @ S$180m pa from 1 Oct, we estimate that it takes up around 90-100MW capacity); and ST Telemedia (8-10-year PPAs for up to 100MW). 2) Effective hedges against gas price fluctuations, especially contracts with no cost pass-through. We believe 2H23 is a good reference point for normalised Singapore power earnings ahead.
Plant maintenance and retirement. Management guided that two-thirds of Singapore’s power capacity will undergo a major scheduled plant maintenance for 60 days in 1H24. We estimate that this could impact the bottom line by c.S$70m in FY24. In addition, Phu My 3 power plant in Vietnam will be returned to the government from end-Feb 2024, reducing annual profit by c.S$10m. Taking these into consideration, gas-related profit could hover around S$670m in F24F and rebound to ~S$700m in FY25F, backed by long-term PPAs.
Commendable renewable performance. Net profit for the renewable segment rose 42% y-o-y to S$200m in FY23 (vs. S$133m for FY22), driven largely by acquisitions in China and India as well as the new energy storage system. The segment contributed c.20% to group profit.
40% growth in renewable installed capacity next 2 years. Gross installed capacity totalled 9.4GW (6.1GW attributable to SCI) as of end-Dec 2023 with an additional 4GW capacity under development and expected to come online in the next two years. This shall drive c.40% growth in renewable installed capacity and organic growth over the next two to three years.
Integrated Urban Solutions is recovering. Net profit saw sequential improvement in 2H23 (+45% h-o-h from a low base), with full-year profit contributions of S$121m (-19% y-o-y). While land sales increased 44% y-o-y to 248ha, growth came largely from lower margin industrial lands. We expect the land sales momentum to continue in Vietnam, driven by the China+1 initiatives.
Decent dividends. SCI declared 8 Scts/share final dividend, bringing full-year dividends to 13 Scts/share (vs. 12 Scts in FY2022), in line with its 23% payout ratio. This translates to a decent dividend yield of over 2%.
Earnings revisions. While spark spread for Singapore power is stronger-than-expected, we are keeping our FY24F estimate largely intact due to the earnings impact from maintenance shutdown. We believe spark spread will stay elevated into 2025 in view of the high contracted capacity and thus are raising our FY25F net profit forecasts by 4%.
Looking ahead, we believe SCI could deliver 5-year CAGR of ~5% from FY23 profit of ~S$950m, based on targets set in their investor day in Nov 2023. Renewable could grow at 25% CAGR if achieving 25GW target by 2028, implying ~S$500m profit. Gas and Related earnings could normalise to ~S$550-600m by 2028 on spark spread normalisation. There could be upside to this as Sakra plant is assumed to run as backup capacity.
