Sembcorp Industries - DBS Research 2024-08-07: Unwarranted Discount To Peers; 1H24 Demonstrated Earnings Resiliency

• Sembcorp Industries reported strong 1H24 net profit of S$540mil (-11% y-o-y), making up ~60% of our full year estimate. The y-o-y decline in net profit was attributable to loss of income during a major plant shutdown for maintenance in 2Q24, as guided.
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1H24 results ahead of expectation

• Excluding exceptional items of S$8mil (gain on bargain purchase of two SPVs) and forex gain of S$46mil (vs S$38mil in 1H23) for Deferred Payment Note (DPN) in India, Sembcorp's core net profit of S$486mil also beat expectations of ~S$450mil for 1H24. This was attributable to stellar performance in Gas & Related Services and Integrated Urban Solutions.
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Gas & related services demonstrated earnings resiliency.

• Gas segment contributed S$339mil (-22% y-o-y; -9% h-o-h) or ~63% of group profit. Adding back the loss of income from plant shutdown, net profit for the segment would have been ~S$390m in 1H24, a tad higher than S$374m in 2H23 and a mere ~10% below the exceptionally high profit in 1H23 (driven by high pool prices), despite ~40% plunge in wholesale pool prices from the high in 1H23.
• The steady earnings underscores Sembcorp’s earnings resiliency, backed by long-term contracts with cost pass through mechanism. This is a testimony to management’s prudent measures in place to mitigate merchant risk, in particularly for the 1.2GW gas-fired capacity in Singapore.
• These measures include:
  1. More than 95% contraction of capacity from 2H23 (average tenure of 12 years), lifted from two-thirds previously, with the commencement of long-term PPAs with:
     1. Micron (18-year PPA to supply up to 450MW of power, with 350MW starting in 2H23);
     2. Singtel (10-year PPA @ S$180m pa from 1 Oct, we estimate that Singtel takes up around 90-100MW capacity);
     3. ST Telemedia (8-10-year PPAs for up to 100MW);
     4. Equinix (up to 18-year PPA to supply 75MWp renewable energy and 30MWp power); and
     5. GSK (up to 10-year PPA to supply up to 10 MW of electricity to all three of GSK's global manufacturing sites in Singapore);
  2. Effective hedges against gas price fluctuations, especially contracts with no cost pass-through. We believe 2H23 and 1H24 are good reference points for normalised Singapore power earnings ahead.

Renewables slid on higher curtailment in China & battery earnings in UK.

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Pei Hwa HO DBS Group Research | https://www.dbs.com/insightsdirect/ 2024-08-07 SGinvestors.io

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