Reaching 25 GW Renewables Capacity By 2028 Will Strengthen Future Position

Key Takeaways

• Strategic capacity expansion and renewables growth position Sembcorp Industries for revenue increases and stable earnings through power purchase agreements and new market projects.
  
• Strong cash flow and urban solutions growth enhance shareholder returns and support sustainable expansion without sacrificing dividends.
  
• Sembcorp Industries faces challenges from market volatility, execution risks in diverse markets, renewable sector variables, integration issues, and dependence on long-term contracts.

Catalysts

An investment holding company, engages in the production and supply of utilities services, and terminalling and storage of petroleum products and chemicals in Singapore, the United Kingdom, China, India, rest of Asia, the Middle East, and internationally.

• Sembcorp Industries is implementing a strategy to secure long-term power purchase agreements (PPAs) for its Singapore gas portfolio, achieving 99% contracted capacity, which enhances earnings predictability and stability, positively affecting future revenue and earnings.
  
• The acquisition of a 30% interest in Senoko Energy and the development of a 600-megawatt hydrogen-ready gas-fired power plant due by 2026 indicate Sembcorp's capacity expansion and strategic positioning to meet energy demands, potentially boosting revenue and net margins through increased efficiency and capacity utilization.
  
• Sembcorp's expansion in renewables, with the addition of 4.1 gigawatts of capacity and successful project completions in new markets like Oman, Indonesia, and the Philippines, showcases its commitment to reaching a target of 25 gigawatts gross installed renewables capacity by 2028, contributing to revenue growth.
  
• The strong performance of the Integrated Urban Solutions segment, with higher land sales and new industrial park investments, particularly in Vietnam and Indonesia, reflects increased operational efficiency and potential for recurring income streams, expected to improve net margins and earnings.
  
• Sembcorp's robust free cash flow, with significant growth in operational cash flows and strategic capital allocation, supports its ability to finance growth without compromising dividends, enhancing shareholder returns and driving future earnings growth.

Sembcorp Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sembcorp Industries's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.9% today to 17.1% in 3 years time.
• Analysts expect earnings to reach SGD 1.2 billion (and earnings per share of SGD 0.68) by about March 2028, up from SGD 1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.3x on those 2028 earnings, up from 11.0x today. This future PE is greater than the current PE for the SG Integrated Utilities industry at 11.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.73%, as per the Simply Wall St company report.

Sembcorp Industries Future Earnings Per Share Growth

Risks

• The decline in Singapore's wholesale power market price by 34% highlights market volatility, potentially affecting future revenue stability and net margins for Sembcorp Industries.
  
• Sembcorp's expansion into diverse markets like India and the Philippines may involve significant execution risks, which can impact the company's ability to achieve projected earnings and market stability.
  
• The renewables sector's exposure to variables such as curtailment in China and lower wind speeds in India could hinder revenue growth and challenge achieving targeted earnings from renewable projects.
  
• Potential integration challenges and uncertainties with partners following the Senoko Energy acquisition may impact strategic plans and financial performance related to operational synergies and revenue projections.
  
• Dependence on establishing long-term PPAs amidst fluctuating market demand and competition may impact revenue predictability and net profit margins, especially if market conditions worsen or if there is increased competition in securing stable contracts.

Valuation

• The analysts have a consensus price target of SGD7.255 for Sembcorp Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD8.0, and the most bearish reporting a price target of just SGD6.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SGD7.3 billion, earnings will come to SGD1.2 billion, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 5.7%.
  
• Given the current share price of SGD6.3, the analyst price target of SGD7.26 is 13.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.