Sembcorp's renewables business could power earnings upside; Goldman Sachs initiates at ‘buy'

Business Times

14-05-2025

[SINGAPORE] Goldman Sachs has initiated coverage of energy and urban solutions provider Sembcorp Industries with a 'buy' recommendation and a target price of S$8.40 on the back of its 'solid business model'.
The target price implies a potential upside of 27.9 per cent from Sembcorp's closing price of S$6.57 on Tuesday (May 13).
In a May 8 report, Goldman Sachs analysts Nikhil Bhandari and Wayne Wang noted that Sembcorp is 'attractively valued', with the market pricing its renewables business at a level aligned with its peers in China and developed markets.
'Despite the company's China exposure, where curtailment rates are rising, we believe the current valuation is overly punitive,' the analysts said.
'Sembcorp is rapidly expanding in regions with more favourable dynamics, such as India and the Middle East, where renewables are cheaper on the power cost curve, and in areas like the Philippines and the UK, where power supply demand is tight,' they added. 'This expansion drives faster earnings growth compared to China and developed market peers.'
In addition, Goldman Sachs forecasts that China's share of Sembcorp's renewables capacity, on an equity-adjusted basis, will fall from 48 per cent in 2024 to 26 per cent by 2028. Meanwhile, India's share is expected to rise to 46 per cent.
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'We believe that maintaining a presence and relationships in China, albeit reduced, could provide synergies to the ex-China business through upstream sourcing capabilities for round-the-clock projects, especially batteries, which are a key bottleneck in regions like India,' said Bhandari and Wang.
The way the analysts see it, Sembcorp's profit after tax could increase at a compound annual growth rate (CAGR) of close to 14 per cent from 2024 through to 2028. They believe some 70 per cent of profits could come from fixed return contracts – with an average duration of over five years – that offer higher returns compared to its utility and renewables peers.
For the full year ended Dec 31, 2024, Sembcorp reported earnings of S$1.01 billion, up 7 per cent from S$942 million the previous year.
Net profit before exceptional items and discontinued operation was S$1.02 billion, comparable to financial year 2023, despite a planned major maintenance in the first half of 2024.
Goldman Sachs sees several key catalysts for driving a continued rerating of Sembcorp's valuation. These include an optimisation of its portfolio, steady capacity growth, and a potential upward revision of its long-term return on equity guidance.
'Sembcorp has consistently optimised its portfolio through capital recycling and its share price has historically reacted positively to such transactions,' the analysts said.
'Overall, we believe the company will continue to optimise its portfolio to position the core renewables and gas divisions for growth and higher returns.'
DBS Group Research analyst Ho Pei Hwa believes Sembcorp could see an uplift in its price-to-earnings valuation multiple, on the back of accretive acquisitions in new renewable markets, steady earnings delivery and potential capital recycling that is value-unlocking.
'Sembcorp is set to deliver promising earnings CAGR of more than 10 per cent through 2028 as its three key business segments enter expansion mode,' Ho said in a report following Sembcorp's FY2024 results, noting that the company is 'firing on all cylinders'.
DBS has a 'buy' call on Sembcorp with a target price of S$8.
Meanwhile, HSBC Global Research analyst Rahul Bhatia sees Sembcorp as 'a good defensive play in current uncertain times'.
'We think a combination of high power generation capacity, direct access to gas (via import licence) and availability of green power gives Sembcorp a strong position in the Singapore market,' Bhatia said in an Apr 15 report.
'Further, we note a large portion of Sembcorp's group profit – about 77 per cent – is backed by long-term power purchase agreements,' he added.