Singapore’s stock market is not generally known as a place to find “growth stocks”. That’s because many of the listed companies on the SGX are mature businesses that pay dividends.
Of course, many of these include REITs and Singapore’s large banks. However, there have been pockets of growth emerging in recent years.
That has been based off some major shifts in business strategies among some of Singapore’s largest listed firms.
One firm which has reinvented itself in recent years is Sembcorp Industries Ltd (SGX: U96), which is aiming to become a leading renewable energy provider.
After shedding itself off Sembcorp Marine, Sembcorp Industries announced a “brown to green” transformation plan that hoped to move away from fossil fuels as its main source of income and shift that towards renewable (or green) sources of energy.
So, with Sembcorp Industries shares already up 46% so far in 2023 – to add to the 69% gain they notched in 2022 – are the renewable energy giant’s shares still worth buying? Let’s find out.
Growth + dividend appeal
One thing which Sembcorp Industries has been able to do is deliver ahead of time on its projected growth targets.
For example, back at its Investor Day in June 2021 – when it announced its strategic shift – Sembcorp Industries set a 2025 target of amassing 10 gigawatts (GW) of renewable energy as part of its portfolio.
It has easily surpassed that already, having racked up 10.3 GW of renewable energy capacity by March of this year.
As a result, it seems highly likely that Sembcorp Industries’ management will revise this 2025 target upwards at some point in the near future.
Meanwhile, we all know that Sembcorp Industries’ dividend had suffered for years pre-transformation.
However, that’s now starting to change as a more stable earnings profile emerges and dividends can be funded reliably (see below).
Source: Sembcorp Industries’ Investor Relations page
For the whole of 2022, Sembcorp Industries paid a dividend per share (DPS) of 12 Singapore cents. This included a special dividend of 4 Singapore cents.
Even if we exclude that special DPS, Sembcorp Industries’ dividend was up 60% year-on-year from FY2021.
Sembcorp Industries earnings back dividend growth
It shouldn’t be forgotten that FY2022 was an unbelievable year for Sembcorp Industries, with net profit (before exceptional items) up 87% year-on-year to S$883 million.
The firm’s renewables segment recorded FY2022 core net profit of S$148 million, up an impressive 150% year-on-year.
For the overall business, core earnings per share (EPS) came in at S$0.41. With a total DPS of 12 Singapore cents, the company’s dividend payout ratio was only 29%, a very manageable level for it to continue to grow into the future.
Another big part of the appeal for investors is that Sembcorp Industries’ renewable energy assets don’t have the volatility in pricing that conventional energy sources do.
Investors should remember, though, that higher gas prices drove a huge chunk of Sembcorp Industries’ earnings in FY2022.
On that front, its conventional energy business continues to provide solid earnings while the firm grows out its renewable energy capabilities.
Building agreements and partnerships
Management isn’t sitting still. Just in the past week, Sembcorp Industries announced that it has signed a 10-year power purchase agreement (PPA) with telco giant Singapore Telecommunications Ltd (SGX: Z74), better known as Singtel.
The contract is worth S$180 million and management stated that it would be accretive to earnings for the firm for its current financial year (FY2023).
In February, Sembcorp Industries also inked another PPA (this one for 18 years) with chip giant Micron Technology.
All these moves to help build out its capabilities and be a clean energy provider of choice in Southeast Asia will no doubt help the company continue to grow earnings.
Valuation not that pricey on a regional comparison
For investors, Sembcorp Industries shares have had an extraordinary run over the past two years or so. However, form a valuation perspective and based off its earnings, shares aren’t actually that expensive.
Right now, they’re trading at a price-to-earnings (PE) ratio of around 11x projected FY2023 earnings. That’s already a 10% discount to regional renewable energy peers listed in both Thailand and Malaysia.
For investors who are seeking out both growth potential and dividends, Sembcorp Industries appears to still be in the early stages of its long-term growth story.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips owns shares of Sembcorp Industries Limited.
