Sembcorp Industries (SCI SP): Small Storms In A Teacup
UOB Kay Hian | Monday, 17 March 2025
The share price decline on Sembcorp Industries’ (SCI) double whammy of negative news from Vietnam and Indonesia last week presents a buying opportunity for investors. SCI’s exposure to Vietnam renewables is only 3% of its attributable capacity and the cancellation of the Indonesian GSA is a non-event given that SCI can source for alternative LNG and costs can be passed on to customers. Maintain BUY with an unchanged target price of S\$8.00.
Storm in a Teacup
Last week’s negative newsflow surrounding SCI’s Vietnam renewables and Singapore conventional energy led to a 5.4% weekly share price decline, making it the fourth worst performer in UOB Kay Hian’s Singapore stock coverage. However, this presents a buying opportunity as SCI’s exposure to Vietnamese renewables is only 3% of its total attributable capacity, and the cancellation of the Gas Sales Agreement (GSA) only affects gas supply from 2027 onwards, with the company able to make up for the shortfall via more LNG imports.
Tariff Troubles in Vietnam
Vietnam signaled its intention to retroactively alter power purchase agreements for renewables, aimed at reducing losses suffered by Vietnam’s state-owned power utility EVN. The government’s move to replace fixed feed-in tariffs with a competitive bidding mechanism has created uncertainty and raised questions about the future of renewable energy investments in Vietnam. However, SCI’s exposure to Vietnamese renewables is relatively small, accounting for only 3% of the company’s attributable installed and under-construction capacity.
Unconcerned About the Cancellation of an Indonesian GSA
Due to the strong growth in domestic demand for gas in Indonesia, the Indonesian Ministry of Energy & Mineral Resources has directed that all of the gas within the Mako field has to be sold to Indonesia’s state-owned electric utility PLN from its start-up in 2027. As a result, SCI had to cancel its GSA with the owners of the Mako gas field, and the company will have to continue to rely on its existing pipeline gas and LNG instead. This is not seen as an issue, as SCI is able to pass on costs to its customers in the event of higher gas prices.
Expansion of IUS Footprint in Vietnam
On a more positive note, SCI announced that it will develop two new Vietnam Singapore Industrial Parks (VSIP) in Nam Dinh and Nghe An provinces, bringing the total number of VSIPs in the country to 20. These projects align with Vietnam’s push for sustainable and high-tech industrial growth, and will be developed as low-carbon industrial parks, strengthening SCI’s presence in Vietnam.
Sustainable Dividends
During its 2024 results, SCI raised its payout ratio to 40%, a material increase from the average payout ratio of 29% over 2021-23. Management emphasized that this higher payout was sustainable in the foreseeable future, underscoring the strong cash generation ability of all of its business segments. The 40% payout ratio remains intact, resulting in a prospective yield of 4.3% for 2025.
Restarting Share Buyback Program
After SCI’s 2024 results, the company has restarted its share buyback program, with S\$2.9m spent on 13 March at an average price of S\$6.04/share. Prior to its results, the company had bought S\$20.7m worth of shares at an aggregate price of S\$5.58/share.
Valuation and Recommendation
Maintain BUY with an unchanged PE-based target price of S\$8.00, using a target PE multiple of 12.6x which is 1.5SD above the company’s 2018-25 average PE of 8.2x (excluding 2020).
