Sembcorp Industries falls 15% from recent highs. Should investors be concerned?

What happened?

We’ve been getting questions from the Beansprout community on the weakness in Sembcorp Industries’ (SCI) share price in the past month. 

From a recent high of S$6.10 on 7 August, Sembcorp Industries’ share price has fallen by close to 15% to reach S$5.15 as of 7 September.

The share price fall came despite the inclusion of Sembcorp Industries in the MSCI Singapore Index on 1 September 2023. With the inclusion, Sembcorp Industries will be one of 22 components of this index designed to track the underlying performance of mid to large capitalisation companies in the Singapore market.

Let us look at Sembcorp Industries’ recent developments to understand if the sell-off in the past month is warranted. 

What you need to know about Sembcorp Industries' (SGX: U96) share price

#1 - Improvement in financial performance

Sembcorp Industries has reported steadily better results over the past two years and has also raised its dividend as can be seen in the table below.

2020 represented the nadir for the group as it reported a S$1.1 billion loss from discontinued operations and impairments arising from the demerger of Sembcorp Marine (now renamed Seatrium Limited).

That year, management proposed a S$2.1 billion renounceable rights issue by Sembcorp Marine to strengthen its balance sheet before paying out a dividend-in-specie of Sembcorp Marine’s shares to shareholders of Sembcorp Industries.

With the loss-making marine division now cut loose, Sembcorp Industries could then focus on its profitable utilities and urban development divisions.

For the first half of 2023 (1H 2023), Sembcorp Industries reported a strong set of earnings as net profit before exceptional items soared 55% compared to the previous year to S$602 million. The improved profit was driven by stronger performance by its conventional power assets in Singapore with higher power prices. 

Sembcorp Industries has also grown its dividends in recent years. Back in 2020, the annual dividend per share stood at just S$0.04 but has since tripled to S$0.12 by 2022 in tandem with the more robust financial performance.

The interim dividend in the first half of 2023 was further raised by 25% year on year from S$0.04 to S$0.05.

#2 - Target to grow renewable portfolio

Sembcorp Industries has made steady progress on several fronts as it works to increase its renewable energy portfolio and has snagged notable contracts and forged partnerships to advance its goals.

Back in May 2021, Sembcorp Industries unveiled a four-year strategic plan to transform its portfolio from brown to green. Management targeted its gross installed capacity for renewable assets to hit 10 GW (gigawatts) by 2025.

Sembcorp Industries has since proven that it can grow its portfolio of renewable energy assets since it spun off its marine division.

Renewables gross installed capacity (including those under development) reached 11.9 GW in the first half of 2023. Gross renewables installed capacity has more than tripled from 2.6 GW at end-2020 to 8.6 GW in the first half of 2023. 

Sembcorp Industries also has a target for 70% of net profit to come from sustainable solutions by 2025. With the contribution in the first half of 2023 coming in at just 27%, SCI is far from this profit target.

With 28 months to go before the end of 2025, Sembcorp Industries will have to work much harder to increase its proportion of net profit from sustainable solutions.

#3 – Mixed progress in capital recycling initiatives  

One of the key reasons investors have been optimistic about Sembcorp Industries earlier was due to various capital recycling initiatives the company could take on to improve returns. 

Sembcorp Industries has announced a number of contracts and agreements that could contribute to its profit in future. 

In May, Sembcorp Industries announced that it would construct a new multi-utilities centre on Jurong Island that will be fully operational by 2026. Within the same month, the group signed a 10-year power purchase agreement with telco Singtel (SGX: Z74) estimated at S$180 million.

Sembcorp Industries also signed a new gas sale agreement with Medco E&P Natuna Ltd in June to import natural gas piped from Indonesia at an estimated value of S$1.9 billion.

More recently, Sembcorp Industries and Petrovietnam Technical Services Corporation announced a joint exploration of the development of offshore wind farms in Vietnam for the export of electricity to Singapore.

However, these business developments will need a gestation period before they contribute positively to Sembcorp Industries’ profit.

In the meantime, there appears to be less progress made in asset divestments. Sembcorp Industries announced in July that it has decided not to sell its waste management business and its energy-from-waste plant. 

What would Beansprout do?

Sembcorp Industries’ fundamentals remain decent with strong earnings in the first half of 2023, a growing renewables portfolio, as well as progress made in various business development initiatives.

However, investors may be concerned about Sembcorp Industries’ ability to achieve its target of having 70% of its profit from sustainable solutions by 2025, as well as progress made in its asset divestment initiatives. 

There might also be remaining concerns about how a cap in wholesale electricity prices in Singapore might impact Sembcorp Industries’ profitability. 

Despite the fall in Sembcorp Industries’ share price in the past month, it has still performed well over the past year. 

As of 7 September, Sembcorp Industries’ share price has gone up by 61% in the past 1 year. Sembcorp Industries’ share price has gone up by a staggering 181% over the past 3 years, making it one of the top-performing components of the bellwether Straits Times Index.

Analysts are still generally bullish on the stock, with an average target price of $6.17 as of 7 September 2023.

Investors who are interested in following Sembcorp Industries’ developments should watch for 6 November as the blue-chip utility group hosts its 2023 Investor Day.

We’d be looking out for the progress Sembcorp Industries’ is able to make in achieving its targets, and whether there will be any revisions made to existing goals.

Relevant links:

• Sembcorp Share Price History
• Sembcorp Target Price and Analysis
• Sembcorp News
• Sembcorp Dividends