Hot Stock: Why is Sembcorp Industries’ share price falling sharply?

What happened?

Sembcorp Industries’ share price fell sharply following the market open on 20^th June.

As at 10.30am, its share price was at S$5.26, representing a 7.2% decline from its previous day closing price of S$5.67. 

At one point, it traded to an intra-day low of S$5.22. 

Let’s take a look at what might be driving the weakness in Sembcorp Industries’ share price.

What is driving the sharp fall in Sembcorp Industries’ share price?

#1 – EMA will cap wholesale power prices in Singapore from 1^st July 2023

According to a Bloomberg report on 19 June, the Energy Market Authority (EMA) will cap wholesale electricity prices in Singapore from 1^st July 2023. 

The objective of this temporary price cap is to act as a “circuit” breaker to mitigate extreme price volatility in the wholesale electricity market. 

According to the EMA, similar mechanisms have been implemented in other countries such as Australia and the Philippines. 

If you are not familiar with Singapore's power market, the wholesale electricity market allows buyers to purchase electricity at prices that vary every half-hour, depending on the demand and supply situation in the market. 

The wholesale electricity price could rise due to reasons such as an increase in electricity demand or an outage of power generating units, and is different from the price of electricity offered to consumers by a licensed electricity retailer in a retail contract. 

#2 – Wholesale electricity prices surged in May

In May 2023, wholesale electricity prices in Singapore as measured by the Uniform Singapore Electricity Price (USEP) surged to as high as S$3,594 per megawatt hour (S$/MWh). 

This came about after one of the power generation plants at Jurong Island was closed for a scheduled maintenance, and power demand surged because of exceptionally hot weather. 

Overall for the month of May, the wholesale electricity price rose to S$503/MWh from S$325/MWh in April. 

#3 – Sembcorp Industries was seen as a beneficiary of higher wholesale electricity prices 

Sembcorp Industries has two power plants in Singapore with a total capacity of about 1,219 MW.

Its net profit from conventional energy rose to S$766 million in FY22 from S$373 million in FY21. The company attributed the strong performance to “higher power prices and margins in Singapore and the UK”

The net profit from conventional energy represents about two-thirds of Sembcorp Industries’ net profit before corporate costs in FY22.

However, it might be worth noting that Sembcorp's conventional energy profit is not entirely dependent on wholesale electricity prices in Singapore. A significant portion of electricity produced in its Singapore power plants would be sold through longer term contracts. Also, Sembcorp has other conventional energy assets in China, Middle East and the UK.

What would Beansprout do?

Sembcorp Industries remains one of the best performing names in the STI year-to-date even with the correction in its share price today. 

The positive view that investors have on Sembcorp Industries is driven by its ability to shift its portfolio towards renewable energy, as well as more active capital recycling initiatives. 

In this month alone, we saw at least two brokers raising their target price of Sembcorp Industries to S$6 and above, according to reports from the Edge on 7 June and 12 June.

For investors who believe in the company's ability to grow its renewables capacity and accelerate on its transformation over the medium term, the share price correction might make the valuation of the stock look more appealing. 

However, we'd be watching out for risks relating to how the latest cap to wholesale electricity prices in Singapore could impact Sembcorp Industries' conventional energy business in the near term. 

Related Links

• Sembcorp Industries Share Price
• Sembcorp Industries Analysis
• Sembcorp Industries Dividends

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