Sembcorp Industries: Divestment, Strategic Moves, and Market Insights

Broker Name: CGS International

Date of Report: November 8, 2024

Introduction

Sembcorp Industries (SCI) has announced a significant divestment of its waste management arm, Sembcorp Environment, for S\$405 million. This move aligns with SCI’s strategy to recycle capital for growth in renewables and reduce debt. The divestment is expected to yield a net disposal gain of S\$114 million. This article provides a comprehensive analysis of this transaction, its implications, and a deep dive into the performance and prospects of SCI and its peers in the renewable energy and utilities sector.

Divestment of Sembcorp Environment at 18x P/E and 1.4x P/BV

On November 8, 2024, SCI entered into a share purchase agreement to sell the entire issued and paid-up share capital of Sembcorp Environment to SBT Investment 2, a wholly-owned subsidiary of PT TBS Energi Utama Tbk. This transaction values Sembcorp Environment at approximately 18x FY24F P/E based on its annualized 1H24 PBT and represents a 43% premium over its net asset value as of June 30, 2024.

Recycling Capital for Growth and Debt Reduction

SCI’s decision to divest Sembcorp Environment is in line with its broader strategy to recycle capital for expansion in the renewables sector and reduce debt. The company plans to use 60% of the proceeds from the sale to pay down debt, offsetting the loss of income with savings in financing costs.

Market Opportunity: Weakness Presents a Buying Opportunity

Despite recent market weakness, SCI’s long-term earnings visibility and growing renewable energy asset portfolio present a compelling buying opportunity. With a target price of S\$7.32 based on 12.5x FY25F P/E, SCI is well-positioned for future growth. Improvement in power curtailment of China’s renewable energy sector and other catalysts such as the finalization of the Senoko Power acquisition and accelerated renewable energy capacity expansion are expected to drive further re-rating.

Financial Performance and Forecasts

SCI’s net profit is forecasted to grow steadily from S\$1,005 million in 2024 to S\$1,073 million in 2026, with core EPS growth of 1.86% in 2026. The company’s recurring ROE is expected to remain robust, though slightly declining from 20.2% in 2024 to 16.3% in 2026. The balance sheet remains strong, with total current assets projected to grow from S\$2,706 million in 2023 to S\$5,108 million in 2026.

Peer Comparison: Renewable Energy and Utilities Companies

Perusahaan Gas Negara (PGAS IJ)

Recommendation: Add

Market Cap: US\$2,367 million

EPS (CY24A): 6.4

EPS Growth (3-year CAGR): 6.9%

Recurring ROE (CY25F): 12.3%

Dividend Yield (CY25F): 10.6%

Perusahaan Gas Negara is expected to see steady growth in EPS and dividend yield, making it a solid investment opportunity in the energy sector.

NTPC Ltd (NTPC IN)

Recommendation: Not Rated

Market Cap: US\$45,703 million

EPS (CY24A): 18.5

EPS Growth (3-year CAGR): 9.6%

Recurring ROE (CY25F): 13.5%

Dividend Yield (CY25F): 2.3%

NTPC Ltd has a strong market position with consistent EPS growth and a healthy ROE, though its dividend yield is modest compared to peers.

Power Grid Corp of India Ltd (PWGR IN)

Recommendation: Not Rated

Market Cap: US\$34,863 million

EPS (CY24A): 18.9

EPS Growth (3-year CAGR): 5.2%

Recurring ROE (CY25F): 18.5%

Dividend Yield (CY25F): 4.4%

Power Grid Corp offers a strong dividend yield and robust recurring ROE, making it an attractive investment in the utility sector.

Tata Power Co Ltd (TPWR IN)

Recommendation: Not Rated

Market Cap: US\$16,390 million

EPS (CY24A): 37.4

EPS Growth (3-year CAGR): 14.8%

Recurring ROE (CY25F): 12.6%

Dividend Yield (CY25F): 0.5%

Tata Power has a high EPS growth rate, though its dividend yield is relatively low, reflecting a focus on reinvestment and growth.

GAIL India Ltd (GAIL IN)

Recommendation: Not Rated

Market Cap: US\$15,912 million

EPS (CY24A): 13.6

EPS Growth (3-year CAGR): 15.2%

Recurring ROE (CY25F): 14.8%

Dividend Yield (CY25F): 5.9%

GAIL India offers a strong combination of EPS growth, high recurring ROE, and a solid dividend yield, making it a desirable investment in the gas sector.

Petronet LNG Ltd (PLNG IN)

Recommendation: Not Rated

Market Cap: US\$5,848 million

EPS (CY24A): 13.5

EPS Growth (3-year CAGR): 7.1%

Recurring ROE (CY25F): 21.1%

Dividend Yield (CY25F): 3.1%

Petronet LNG is notable for its high recurring ROE and stable dividend yield, positioning it well within the LNG sector.

Adani Green Energy Ltd (ADANIGR IN)

Recommendation: Not Rated

Market Cap: US\$30,013 million

EPS (CY24A): 188.5

EPS Growth (3-year CAGR): 72.7%

Recurring ROE (CY25F): 20.7%

Adani Green Energy’s exceptionally high EPS growth rate and strong recurring ROE highlight its rapid expansion in the renewable energy sector.

Gas Malaysia Berhad (GMB MK)

Recommendation: Hold

Market Cap: US\$1,110 million

EPS (CY24A): 13.2

EPS Growth (3-year CAGR): -8.9%

Recurring ROE (CY25F): 21.6%

Dividend Yield (CY25F): 5.3%

Despite negative EPS growth, Gas Malaysia Berhad maintains a strong recurring ROE and high dividend yield, providing stability to investors.

Malakoff Corporation (MLK MK)

Recommendation: Add

Market Cap: US\$937 million

EPS (CY24A): 14.8

EPS Growth (3-year CAGR): -23.4%

Recurring ROE (CY25F): 5.8%

Dividend Yield (CY25F): 6.5%

Malakoff Corporation offers a high dividend yield but faces challenges with negative EPS growth, necessitating close monitoring of its performance.

Petronas Gas (PTG MK)

Recommendation: Hold

Market Cap: US\$7,956 million

EPS (CY24A): 18.7

EPS Growth (3-year CAGR): 1.0%

Recurring ROE (CY25F): 13.5%

Dividend Yield (CY25F): 4.4%

Petronas Gas maintains a robust recurring ROE and dividend yield, making it a reliable investment in the gas sector.

Tenaga Nasional (TNB MK)

Recommendation: Add

Market Cap: US\$19,100 million

EPS (CY24A): 22.6

EPS Growth (3-year CAGR): 4.4%

Recurring ROE (CY25F): 7.6%

Dividend Yield (CY25F): 3.4%

Tenaga Nasional offers consistent EPS growth and a solid dividend yield, positioning it well within the utilities sector.

YTL Power International (YTLP MK)

Recommendation: Add

Market Cap: US\$6,070 million

EPS (CY24A): 8.6

EPS Growth (3-year CAGR): 34.3%

Recurring ROE (CY25F): 13.5%

YTL Power International has impressive EPS growth and a strong recurring ROE, making it an attractive investment in the power sector.

Sermsang Power Corporation (SSP TB)

Recommendation: Add

Market Cap: US\$219 million

EPS (CY24A): 4.5

Sermsang Power Corporation focuses on renewable energy with a modest market cap and consistent EPS performance.

B Grimm Power PCL (BGRIM TB)

Recommendation: Not Rated

Market Cap: US\$1,629 million

EPS (CY24A): 29.4

EPS Growth (3-year CAGR): 15.5%

Recurring ROE (CY25F): 5.8%

Dividend Yield (CY25F): 1.9%

B Grimm Power PCL shows strong EPS growth but offers a modest dividend yield, reflecting its focus on reinvestment in growth.

Banpu Power PCL (BPP TB)

Recommendation: Not Rated

Market Cap: US\$1,055 million

EPS (CY24A): 10.4

EPS Growth (3-year CAGR): -6.4%

Recurring ROE (CY25F): 7.2%

Dividend Yield (CY25F): 5.5%

Banpu Power PCL offers a high dividend yield despite negative EPS growth, providing stability to investors in the power sector.

BCPG PCL (BCPG TB)

Recommendation: Not Rated

Market Cap: US\$536 million

EPS (CY24A): 6.0

EPS Growth (3-year CAGR): 13.3%

Recurring ROE (CY25F): 3.5%

Dividend Yield (CY25F): 4.0%

BCPG PCL demonstrates solid EPS growth and a decent dividend yield, highlighting its potential in the renewable energy sector.

Energy Absolute PCL (EA TB)

Recommendation: Not Rated

Market Cap: US\$741 million

EPS (CY24A): 5.3

EPS Growth (3-year CAGR): -20.9%

Energy Absolute PCL focuses on renewable energy despite challenges with negative EPS growth, indicating potential for long-term recovery.

Global Power Synergy PCL (GPSC TB)

Recommendation: Not Rated

Market Cap: US\$3,391 million

EPS (CY24A): 26.5

EPS Growth (3-year CAGR): 20.4%

Recurring ROE (CY25F): 4.9%

Dividend Yield (CY25F): 2.7%

Global Power Synergy PCL boasts strong EPS growth, though its dividend yield remains modest, reflecting a focus on reinvestment.

Gulf Energy Development PCL (GULF TB)

Recommendation: Not Rated

Market Cap: US\$22,281 million

EPS (CY24A): 40.9

EPS Growth (3-year CAGR): 19.1%

Recurring ROE (CY25F): 14.9%

Dividend Yield (CY25F): 1.6%

Gulf Energy Development PCL showcases impressive EPS growth, positioning it as a leader in the energy sector, despite a lower dividend yield.

Ratch Group PCL (RATCH TB)

Recommendation: Not Rated

Market Cap: US\$1,961 million

EPS (CY24A): 9.7

EPS Growth (3-year CAGR): 14.6%

Recurring ROE (CY25F): 7.9%

Dividend Yield (CY25F): 5.4%

Ratch Group PCL offers a balanced approach with solid EPS growth and a strong dividend yield, appealing to investors seeking stability and growth.

TPI Polene Power PCL (TPIPP TB)

Recommendation: Not Rated

Market Cap: US\$744 million

TPI Polene Power PCL is a notable player in the power sector, though detailed EPS and ROE metrics are not provided in the report.

Super Energy Corp PCL (SUPER TB)

Recommendation: Not Rated

Market Cap: US\$217 million

Super Energy Corp PCL operates in the renewable energy sector, with limited financial details available in the report.

Beijing Jingneng Clean Energy (579 HK)

Recommendation: Not Rated

Market Cap: US\$2,025 million

EPS (CY24A): 4.8

EPS Growth (3-year CAGR): 11.2%

Recurring ROE (CY25F): 10.4%

Dividend Yield (CY25F): 9.1%

Beijing Jingneng Clean Energy offers a strong dividend yield and solid EPS growth, positioning it well in the clean energy sector.

China Datang Corp Renewable Power (1798 HK)

Recommendation: Not Rated

Market Cap: US\$1,993 million

EPS (CY24A): 7.2

EPS Growth (3-year CAGR): 6.5%

Recurring ROE (CY25F): 10.2%

Dividend Yield (CY25F): 4.4%

China Datang Corp Renewable Power demonstrates steady EPS growth and a solid dividend yield, making it an attractive investment in renewable power.

China Longyuan Power Group (916 HK)

Recommendation: Not Rated

Market Cap: US\$15,650 million

EPS (CY24A): 7.9

EPS Growth (3-year CAGR): 11.1%

Recurring ROE (CY25F): 9.5%

Dividend Yield (CY25F): 3.9%

China Longyuan Power Group offers strong EPS growth and a decent dividend yield, solidifying its position in the power sector.

China Gas Holdings Ltd (384 HK)

Recommendation: Not Rated

Market Cap: US\$4,776 million

EPS (CY24A): 11.6

EPS Growth (3-year CAGR): 13.1%

Recurring ROE (CY25F): 7.8%

Dividend Yield (CY25F): 7.5%

China Gas Holdings Ltd maintains a high dividend yield and solid EPS growth, reflecting its strong market position.

China Resources Gas Group Ltd (1193 HK)

Recommendation: Not Rated

Market Cap: US\$8,795 million

EPS (CY24A): 11.9

EPS Growth (3-year CAGR): 8.4%

Recurring ROE (CY25F): 12.6%

Dividend Yield (CY25F): 4.8%

China Resources Gas Group Ltd offers a balanced approach with steady EPS growth and a solid dividend yield.

China Resources Power Holdings (836 HK)

Recommendation: Not Rated

Market Cap: US\$11,996 million

EPS (CY24A): 6.0

EPS Growth (3-year CAGR): 20.8%

Recurring ROE (CY25F): 16.6%

Dividend Yield (CY25F): 7.4%