Singapore’s Star Stock Needs Renewables Push to Keep Going

  • Shares of Sembcorp Industries have gained 49% this year
  • Co. expects better results on higher traditional energy prices

Published in Bloomberg by Ishika Mookerjee on 4 August 2022 – 12.46 pm

This year’s surge in energy prices has taken Sembcorp Industries Ltd.’s shares close to their peak, but any further outperformance hinges on its push for a clean-energy portfolio.

The Singapore-listed utilities company has jumped 49% this year, making it the top performer on the Straits Times Index. While the stock is expected to gain 15% over the next year, that’s still below the benchmark’s forecast 18%, according to analysts. The divestment of its coal plants in India and more deals related to the solar and wind sectors are needed to maintain momentum, analysts say.

Soaring electricity tariffs due to higher fuel costs have helped support the utilities company in some of its key markets such as India and Singapore. But with commodity prices softening, the firm’s first-half results — due to be announced Friday — and target for 70% profit contribution from the renewables segment by 2025 will be closely watched.

“This move to renewables is essentially good for their bottom line because in terms of margin and return-on-equity, it’s a lot higher” due to lower costs, said Terence Chua, a senior research analyst at Phillip Securities Research Pte. The broker downgraded the stock to neutral from accumulate on Monday, citing the recent share-price surge.

Phillip Securities, Citigroup Inc. and Maybank Research Pte say the time is ripe for the company to sell its Indian thermal portfolio, after unit Sembcorp Energy India Ltd. signed two power purchase agreements earlier this year.

“This puts SCI’s India business in a stronger position financially” and has made the thermal plants more attractive to potential acquirers, Maybank analyst Kelvin Tan wrote in a note on Tuesday. Meanwhile, Phillip Securities’ Chua said the company also has “a strong pipeline” of solar- and wind-energy deals in China, India and Singapore, and for battery storage in the UK.

The company has benefited from the spike in natural gas and coal prices in particular, which are vital to its dominant conventional-energy portfolio. The shares jumped to a 2007-high in July after it said its first-half results would be “materially higher” from a year ago. The stock has since slipped.

“We believe material decarbonization of its asset portfolio would re-rate SCI, which we view as a defensive stock against inflation and recession fears and as an attractive ESG play,” Citigroup analyst Jame Osman wrote in a July 15 note.

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