Renewable energy will be a growth engine for Sembcorp Industries U96 0.23% , with stable earnings visibility coming from its Singapore power capacity, which is nearly fully contracted till 2024, says PhillipCapital Research analyst Peggy Mak.

 

Sembcorp should see an uplift in energy demand with China&rsquo s reopening, adds Mak in an April 15 note, as China accounts for 53% of its gross installed capacity.

 

In addition, India&rsquo s growing share of global manufacturing output is another tailwind, as manufacturers set up &ldquo China+&rdquo manufacturing bases to diversify risks, says Mak.

 

Finally. Sembcorp has added renewable energy assets, mainly through joint ventures that do not strain its balance sheet. Total gross installed and under development capacity has increased by 24% since end-2022 to reach 10.3 gigawatts (GW), surpassing its target of 10GW in installed renewable energy capacity by 2025.

 

Mak estimates a return on equity (ROE) of 8%-10% on these assets, but ROE from future acquisitions could decline, due to higher interest costs, intense competition for these assets and a softer macro environment that will affect tariffs.

 

Mak maintains &ldquo buy&rdquo on Sembcorp, with a higher target price of $5.06 from $3.68 previously. Mak&rsquo s latest target price represents an upside of 20.2% against a last traded price of $4.30 on April 14.

 

Singapore powers up

 

Sembcorp&rsquo s Singapore power capacity is nearly fully contracted till 2024, with the latest 18-year power purchase agreement signed with a unit of Micron Technology for up to 450 megawatts (MW).

 

Singapore accounts for more than 70% of revenue and Sembcorp earns a spread on the sale of energy, writes Mak.

 

Though the Uniform Singapore Energy Price (USEP) has eased by 10.5% in January to March 2023 compared with FY2022, margins should be maintained as it works on a cost-plus model., says Mak.

 

The Energy Market Authority (EMA) is calling for proposals in 2H2023 to add electricity generation capacity by 2028.

 

Peak electricity demand is projected to rise at a CAGR of 4%-6% to reach between 10.1GW and 11.7GW by 2028, up from 7.8GW currently. &ldquo We believe this lowers reserve margin from the current 34% to less than 15%,&rdquo says Mak.

 

To ride on the growth in energy demand, Sembcorp has commissioned the construction of its fourth hydrogen-ready 600MW combined cycle power plant, which will be operational by 2026.

 

India, Vietnam assets

 

Mak notes that Sembcorp&rsquo s sale of its Indian power plants for $2 billion at end February 2023 will not dent its net profit. &ldquo Sembcorp extended a 15-year extendable loan to the buyer at an interest rate of about 9%. We estimate interest income of about $132 million, which would offset net earnings loss of $144 million from these assets.&rdquo

 

Sembcorp will, however, book a non-cash accounting loss of $81 million in FY2024 from the reversal of currency translation and capital reserves.

 

Meanwhile, Sembcorp&rsquo s land sales will be ramped up to 500 ha in 2025, underpinned by a strong order book of 312 ha and landbank of 2,743 ha, which are mainly in Vietnam. These would bring net gearing down to 0.96x at end-2024, according to Mak.

 

On Feb 21, the company reported earnings of $848 million for FY2022 ended Dec 31, 2022, up 204% over FY2021&rsquo s $279 million. Revenue was up 21% to $9.4 billion, with growth from both its conventional and renewable energy segments.

 

Sembcorp plans to pay a final dividend of four cents, and a special dividend of the same amount. This will bring the total payout for FY2022 to 12 cents.

 

Sembcorp has also been active in share buybacks. On March 1, it acquired 808,700 shares at $3.67 each on the open market. In subsequent buybacks, Sembcorp acquired its own shares at steadily higher prices, reaching $4.09 on March 21, when it acquired 784,500 shares.

 

On March 22, the company acquired 1.25 million shares at $4.13 each, bringing the total number of shares bought back under the current mandate to 15.36 million, equal to 0.861% of the total share base.

 

As of March 31, Sembcorp had bought back 0.86% of its issued shares (excluding treasury shares) as of the date of the buyback resolution, which was April 21, 2022.

 

In fact, Oversea-Chinese Banking Corporation (OCBC) and Sembcorp filed the highest buyback considerations on the Singapore Exchange in 1Q2023. During the quarter, Sembcorp bought back 6,415,500 shares at an average price of $3.99, including stamp duties, clearing charges etc paid or payable for the shares.

 

IN THE first quarter of 2023, more than 40 Singapore primary-listed companies bought back shares with a total consideration of S$126 million, less than the consideration tally of S$150 million in Q4 2022 and S$298 million in Q1 2022.

 

The two stocks that filed the highest buyback consideration in Q1 2023 were OCBC : O39 0% and Sembcorp Industries : U96 +1.15%.

 

During the quarter, the Straits Times Index (STI) generated a 0.2 per cent price gain, with dividends boosting the total return to 0.8 per cent.

 

Three other STI stocks that conducted buybacks during the quarter were Singapore Exchange : S68 -0.52%, Singapore Technologies Engineering : S63 -1.08% and Venture Corporation : V03 -1.33%.

 

The buyback considerations of these five companies made up just over three-fifths of the S$126 million in combined consideration for Q1 2023.

 

OCBC

In Q1, OCBC bought back 3.2 million shares at an average price of S$12.50, including stamp duties, clearing charges etc paid or payable for the shares.

 

As of Mar 31, OCBC had bought back 0.44 per cent of its issued shares (excluding treasury shares). The base date for determining the exact 0.44 percentage is the date of the buyback resolution, which was Apr 22, 2022.

 

OCBC maintains that shares purchased under the share buyback programme are held as treasury shares, and recorded as a deduction against share capital, and may be subsequently cancelled, sold, or used to meet delivery obligations under employee share schemes.

 

As the company noted in the capital management section of its annual report for 2022, during the financial year ended Dec 31, 2022, the bank purchased 20.9 million ordinary shares for S$250 million as part of its share buyback programme, while 24.2 million treasury shares were delivered to meet obligations under its employee share schemes.

 

OCBC&rsquo s employee share schemes include the Share Option Scheme, the OCBC Employee Share Purchase Plan (ESPP) and the OCBC Deferred Share Plan.

 

OCBC has ceased granting share options under the OCBC Share Option Scheme 2001 effective from financial year 2018 remuneration.

 

The scheme, which was extended from 2011, had ceased operation on Aug 2, 2021 with share options granted in prior years continue to be outstanding until the options lapse or are exercised by the recipients.

 

The OCBC ESPP was implemented for all employees of the participating companies in the group, including executive directors, to inculcate in all participants a stronger and more lasting sense of identification with the group.

 

It is a savings-based share ownership plan to help employees own ordinary shares in the bank through their monthly contributions via deductions from payroll and/or funds from the Central Provident Fund.

 

The OCBC Deferred Share Plan aims to increase the performance orientation and retention factor in compensation packages of executives and foster an ownership culture within the organisation.

 

It also aligns the interests of executives with the sustained business performance of the bank.

 

Group executives holding the rank or equivalent rank of assistant manager and above, and any group executive director selected by the remuneration committee, are eligible to participate in the plan.

 

Sembcorp Industries

In Q1 2023, Sembcorp Industries bought back 6,415,500 shares at an average price of S$3.99, including stamp duties, clearing charges etc paid or payable for the shares.

 

Sembcorp Industries noted in its annual report for 2022 that during the financial year ended Dec 31, 2022, it acquired 8,947,300 ordinary shares in the company by way of on-market purchases.

 

These were acquired between Sep 15 and Dec 7, at an average price of S$3.13, including stamp duties, clearing charges etc paid or payable for the shares.

 

The company added that in 2022, a total of 5,698,878 treasury shares were re-issued pursuant to the Performance Share Plan (PSP) and Restricted Share Plan (RSP).

 

Sembcorp Industries also noted that as of Dec 31, 2022, it held 10,763,948 of its own uncancelled shares as treasury shares that may be re-issued upon the vesting of performance shares and restricted shares under the PSP and RSP respectively.

 

As of Mar 31, 2023, Sembcorp Industries had bought back 0.86 per cent of its issued shares (excluding treasury shares) as of the date of the buyback resolution, which was Apr 21, 2022.

 

Sembcorp Industries maintain the PSP and RSP help to motivate key management personnel to keep striving for the group&rsquo s long-term shareholder value.

 

In addition, its share-based incentive plans aim to align the interests of participants and shareholders, to improve performance and achieve sustainable growth for the company.

 

In 2021, the board of Sembcorp Industries approved a five-year Transformation Incentive plan (PSP-TI) under the PSP, to further strengthen the alignment of the long-term incentive of the group president and chief executive officer, as well as key management personnel, to the group&rsquo s brown-to-green transformation strategic goals.

 

The PSP-TI is linked to specific long-term environmental, social and governance transformation goals including greenhouse gas emissions, intensity reduction, gross installed renewable energy capacity, sustainable solutions&rsquo profit and sustainable land banking and land sales.

 

Non-STI stocks that led the buyback consideration tally in Q1 2023 included Keppel Reit : K71U -0.55%, Comba Telecom Systems Holdings : STC 0%, Yangzijiang Financial Holding : YF8 0%, Nanofilm Technologies International : MZH -0.61% and Best World International : CGN -3.27%.

 

Share buyback information can be found on the company disclosure page on the Singapore Exchange website, using the Announcement category and sub-category of Share Buy Back-On Market.

 

Motivations for share buybacks can include employee compensation plans or long-term capital management.