To The Moon

CGS CIMB analysts Lim Siew Khee and Izabella Tan have kept their "add" call and $5.12 on Sembcorp Industries following a ten-year power supply deal inked with Singtel.

Under terms of the deal, Singtel will pay $180 million a year starting from Oct 2023, following the expiry of the current agreement this Sept.

Citing figures from Sembcorp's annual reports, the utilities company booked interested party transaction sales of $174 million for FY2021 and $146 million for FY2019.

The new power supply deal will be put forward Singtel shareholders for their go ahead as part of the AGM agenda on July 28.

This multi-year deal with Singtel follows a similar 18-year deal by Sembcorp with Micron.

In its separate announcement on May 25, Singtel says that Sembcorp's proposal was the most competitive out of four potential suppliers considered.

Singtel also said that it has been offered the option to request Sembcorp to supply solar power, as well as opportunities for Singtel to participate in the latter's renewable energy projects to support Singtel’s green journey.

According to Lim and Tan's estimate, with the Singtel and Micron deals in the bag, Sembcorp has secured takers for between 650 and 700 MW of capacity, out of its total of 1.2 GW installed here, for the coming 1 to 18 years.

"As shorter-term contracts roll off, we believe Sembcorp would need to achieve a balance, leaving some capacity to ride on the spot market.

The analysts note that Singapore's so-called uniform Singapore energy price (USEP) has been surprisingly strong year to date at an average of $339/MWh, up 30% over 2H22’s average of $259/MWh, spurred by hotter weather and periods of unplanned maintenance of some plants.

If spot prices remain firm, they see upside to their Sembcorp's current FY2023 earnings estimate of $629 million, which will be up 4% y-o-y。

The target price, held steady at $5.12, is pegged to 12 x forward FY2024 earnings, and is at a 10% discount to Sembcorp's regional utilities peers.