There is a famous line from veteran investor Warren Buffett that goes: “If the business does well, the stock (price) eventually follows”.
Investors in Sembcorp Industries Ltd (SGX: U96), or SCI, can attest to the accuracy of this statement.
The blue-chip utility group has seen its share price scale a five-year high to close at S$4.30 recently.
The last time SCI’s share price touched this level was back in May 2015, almost eight years ago.
The group’s share price has also soared 58% in a year and is up 25% year to date.
The utility and urban development giant must be doing something right to see its share price scaling multi-year highs.
What investors may like to know is – can SCI continue this momentum and see its business scale new heights?
Net profit and dividend at multi-year highs
There is a good reason why SCI is seeing an impressive share price performance.
The group released a sterling set of financial results for 2022 with its net profit more than tripling year on year to S$848 million.
Even after excluding one-off and exceptional items, net profit surged 87% year on year to S$883 million, the highest since 2017.
Its free cash flow also topped S$1 billion in 2022, up from the S$929 million generated in 2021.
SCI’s total dividend for 2022 came up to S$0.12, inclusive of a S$0.04 special dividend, and was more than double the S$0.05 paid out a year ago.
From 2017 to 2021, the utility giant’s annual dividend hovered between S$0.04 and S$0.05, making 2022’s total dividend count as a sweet bonus for investors.
The Renewables portfolio is close to hitting its target
SCI’s main focus is to grow its renewables portfolio such that the profit contribution from this segment hits 70% by 2025.
This target was communicated by the group during its Investor Day back in June 2021.
For 2022, the share of net profit from sustainable solutions stood at 27%.
The good news is that this net profit has grown at a compound annual growth rate (CAGR) of 35%.
Moreover, SCI’s renewables gross installed capacity is also inching towards its target of 10 GW by 2025.
The group announced the completion of the acquisition of 795 MW of solar assets in China earlier this month, lifting its renewables portfolio to 9.8 GW.
It also snagged its first greenfield project in Oman to build, own and operate a 500 MW solar power plant that will be operational by 2025.
With this contract, SCI’s goal of hitting 10 GW in renewables capacity should be achieved by 2025.
There is also a high chance that profits from this division will continue to rise along with the increase in capacity.
Urban development efforts gathering pace
Aside from its renewables division, SCI has also been busy growing its urban development division.
Last month, the group deepened its cooperation with Becamex IDC Corporation, its partner in Vietnam, to co-establish five Vietnam-Singapore Industrial Parks (VSIPs) valued at around US$1 billion.
And just this week, SCI’s joint venture company with Becamex signed Memoranda of Understanding with the leaders of nine provinces in Vietnam to develop smart and sustainable industrial parks.
Feasibility studies will be conducted and those that pass muster will progress to a cooperation agreement subject to the award of an investment registration certificate from Vietnam’s central government.
If successful, this initiative could see SCI growing its footprint further in Vietnam with the establishment of multiple VSIPs.
Savvy capital recycling initiatives
Apart from growing its two divisions as described above, SCI is also recycling its capital to fund more promising initiatives.
Last September, it announced the divestment of its Indian energy division for S$2.1 billion to focus on further growing its renewables division.
And recently, the news reported that SCI is mulling the sale of its waste management unit, SembWaste, and is looking to raise about US$700 million.
Get Smart: The momentum should continue
It’s clear that management is intent on building and growing SCI’s business and has taken many steps to grow not just its Renewables capacity but also its urban development footprint.
The group’s profits should continue to rise along with these business developments, thereby allowing it to generate healthy positive free cash flow and, hopefully, pay out higher core dividends.
Referring back to Buffett’s statement, SCI’s share price should follow the upward trajectory of its business if the group can maintain its growth momentum.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
