Why Did Sembcorp Industries Stock Just Drop 9%?

June 20, 2023

Singapore’s stock market is known for its stability and dividend-paying companies. However, from time to time there will always be market-moving events that impact companies.

And so that was the case for a large Straits Times Index constituent; Sembcorp Industries Ltd (SGX: U96).

Its shares fell as much as 11.6% on Tuesday (20 June) following an announcement from Singapore’s Energy Market Authority, before clawing back some of those losses and closing out the day down 9.2%.

But should investors be concerned? Here’s what Singapore investors and Sembcorp Industries shareholders need to know.

Temporary price cap for Singapore power

The big news of the day was the announcement from the EMA that it would impose a temporary price cap on wholesale electricity prices.

This would be done to prevent huge swings in electricity prices, thereby helping end consumers.

The cap would go into effect from 1 July and would be calculated using a formula that includes the long-run marginal cost of generation capacity.

Should investors be worried about Sembcorp Industries?

In terms of the actual impact of the price cap, it’s not clear that it will have that much of an immediate impact on the earnings profile of Sembcorp Industries in FY2023.

Indeed, in the paper that the EMA released in which it announced the cap measures, it also stated that the price cap was a:

“Short-term measure aimed at mitigating the vicious circle of sustained volatility and risk aversion in the Singapore wholesale electricity market, and restoring the orderly functioning of the broader market”.

Besides that, the stock market has already adjusted earnings expectations – based on Sembcorp management’s comments for normalising power prices in 2023.

That means the price cap isn’t likely to fundamentally (or meaningfully) change the earnings profile of Sembcorp Industries this year.

Focus on the long-term story

Further out, the overarching narrative of Sembcorp Industries’ “brown-to-green” transformation plan hasn’t changed.

In fact, more and more of its renewables assets that are being acquired are actually outside Singapore (primarily in China and India).

Combined with that approach, Sembcorp is also looking at securing more long-term power purchase agreements (PPAs) that give shareholders, customers and Sembcorp management more visibility on pricing and cash flows.

That’s a positive for all stakeholders involved in the process. A perfect example of this in action was the recent long-term PPA that Sembcorp Industries signed with telco giant Singapore Telecommunications Ltd (SGX: Z74), better known as Singtel.

So, while the recent news regarding power price caps may impact sentiment for Sembcorp Industries stock in the short term, the long-term story of the company hasn’t changed at all.

For long-term investors, it could be an opportunity to buy (or accumulate) given the disconnect between the share price fall and the likely change in fundamentals.

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.

Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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