Sembcorp Industries rallies after Investor Day. What’s driving investor optimism?

What happened?

Sembcorp Industries Ltd, or SCI, held its Investor Day 2023 this week to chart its new 5-year plan.

The Investor Day is timely as Sembcorp Industries' share price came under pressure recently, declining by more than 20% from its 52-week high of $6.10 to below S$5. 

Following the Investor Day, Sembcorp Industries’ share price jumped to as high as $5.26 on 7 November, before closing at S$5.05 on 10 November. 

Sembcorp Industries' share price has gone up by 47% year-to-date, outperforming the STI which declined over the same period.

Let us take a closer look at several highlights of Sembcorp Industries' latest Investor Day to understand what is driving investor optimism.

What we learnt from Sembcorp Industries' Investor Day 2023

#1 – Growing its renewables portfolio to 25 Gigawatt (GW)

At its 2021 Investor Day, Sembcorp Industries committed to grow its renewables portfolio from 2 GW to 10 GW by 2025.

Sembcorp Industries also targeted a 70% share of net profit from sustainable solutions by that year.

Fast forward to today, and Sembcorp Industries has exceeded its target of 10 GW in the first nine months of 2023 (9M 2023) with a total gross renewables capacity (comprising both installed and under construction) of 12 GW.

The plan is to further increase this capacity to 25 GW by 2028 for a compound annual growth rate (CAGR) of 22%.

To achieve this, Sembcorp Industries will strengthen its capabilities in wind, solar, and energy supply and deepen its presence in the key growth markets of China and India.

A total of 1,300 GW of new build capacity is expected between 2023 to 2028 in these key markets, which should provide ample opportunities for Sembcorp Industries to grow its portfolio of assets.

As of 30 September 2023, the renewables gross installed capacity of 8.7 GW comprised mainly China (62%) and India (27%). Wind energy also took up the lion’s share of the portfolio at 62%.

By 2028, Sembcorp Industries hopes to reduce its China weight such that China, the UK and the Middle East make up half of gross installed capacity with the other half belonging to India and Southeast Asia.

Of the 25 GW target in 2028, wind and energy storage will take up 50% with solar making up the remainder.

China is the world’s fastest-growing renewables market with a 17% CAGR from 2023 to 2028, while India will also see a similar rate of growth over the same period.

#2 – Reduction in emissions intensity

In line with its vision of growing its renewables portfolio, Sembcorp Industries will also reduce its emission intensity.

The current intensity is 0.3 tCO2e/MWh and the plan is to reduce this by half to 0.15 tCO2e/MWh by 2028.

The diagram below explains the targets set for each year (2025 and 2028) and SCI’s goal of achieving net zero emissions by 2050.

#3 – An ambitious capital allocation plan

Sembcorp Industries has an ambitious capital allocation plan and targets to spend S$14 billion from 2024 through 2028.

As can be seen above, the bulk (75%) of the spending will be for its renewables segment while 10% of the budget will be allocated to decarbonisation solutions.

Of the total S$14 billion investment, half will come from operating cash flow while the remainder will be funded by project debt (30%) and capital recycling & partnerships (20%).

Sembcorp Industries also touts its ability to access green sources of funding to bring down its interest cost.

Around 71% of its loans are on fixed rates (as of 30 June 2023) with over S$2 billion in undrawn committed facilities.

At the same time, Sembcorp Industries' Urban Development division’s performance has not met expectations and SCI will review its strategy while appointing a new CEO for the division.

The group sees healthy market potential for its Urban Development business in both Vietnam and Indonesia and will continue to build up its land bank.

#4 – Long-term PPAs generate recurring income

Sembcorp Industries relies on long-term power purchase agreements (PPAs) to generate a predictable income stream for the group.

As of 30 September, around 72% of its gas portfolio is contracted for more than five years.

The group is also the first in the market to secure multiple PPAs with customers, with a weighted average of 12 years for its gas portfolio.

These contracts supply a steady stream of recurring income which Sembcorp Industries can redeploy to grow its renewables portfolio.

The slide below shows how Sembcorp Industries has built itself up as a player with a full suite of competitive and green energy solutions.

What would Beansprout do?

Sembcorp Industries' share price has performed well after its previous Investor Day in 2018, as the company has increased its earnings and increased its renewables capacity.

With the 2023 Investor Day, Sembcorp Industries has come up with a set of ambitious targets to further grow its renewable energy portfolio and reduce its emissions by 2028.

It has also devised a capital allocation plan supported by recurring cash flows from long-term PPAs.

The commitment to continue its shift towards green energy might be the reason why analysts remain fairly positive on Sembcorp Industries, with a consensus share price target of S$6.70 as of 10 November 2023.

This would be more than 30% above its share price of S$5.05 as of 10 November.

We will be monitoring SCI’s progress towards these targets in the coming years to determine if the company can unlock value for shareholders through these announced initiatives.

Related links:

• Sembcorp Industries share price
• Sembcorp Industries dividend