Sembcorp shares recover despite impending energy price cap

SINGAPORE - The shares of Sembcorp Industries recovered on Wednesday following a sharp fall on Tuesday as analysts took a sanguine outlook on the company’s earnings despite the impact of the Energy Market Authority’s (EMA) plans to

introduce a temporary price cap (TPC) on wholesale electricity prices.

The counter closed 23 cents, or 4.5 per cent, up at $5.38 on Wednesday as bargain hunters picked up the stock following several positive calls on it in recent weeks.

Meanwhile, Keppel Corp’s stock recovered 10 cents, or 1.5 per cent, to $6.70 at the close.

Sembcorp had fallen 9.2 per cent on Tuesday after the EMA announcement, while Keppel Corp slid 5.2 per cent.

While both companies are energy providers and will be impacted by the EMA’s action, Sembcorp is seen as more vulnerable to the regulatory changes than Keppel Corp, which is seen as boasting a more diversified portfolio.

The EMA’s TPC on wholesale electricity prices will take effect from July 1 to prevent huge volatility in electricity prices.

Under the new policy, if the moving average price for 24 hours exceeds the threshold, TPC will be activated for at least 24 hours till the moving average price falls below the threshold again.

Tuesday’s slumps took the air out of the two stocks after steady rises in recent weeks. Keppel Corp was up almost 10 per cent last week, and hit its highest since mid-2014 at $7.05 last Thursday.

Meanwhile, Sembcorp has risen almost 12 per cent in June, and hit an all-time high at $5.79 last Thursday.

DBS Bank estimates that if the TPC mechanism had been in place during the January 2021 to April 2023 period, there would have been a total of 26 TPC activations, or about a 4 per cent occurrence, reducing the Uniform Singapore Energy Price (USEP) by 7 per cent. The USEP is the half-hourly energy price in the Singapore wholesale electricity market.

“Assuming about a $20 per megawatt hour (MWh) reduction in average USEP as illustrated in the consultation paper, the impact to Sembcorp could be about $30 million, or 4 per cent, of annual group profit,” DBS wrote on Tuesday.

In its report on Tuesday afternoon, CGS-CIMB estimated that with the start of the TPC, Singapore’s USEP will be in the range of $285 per MWh to $570 per MWh in the second half of 2023, and “still yielding good margins”.

The investment house estimates that Sembcorp’s current exposure to spot electricity rates is about 25 per cent.

“We estimate the TPC would have a $36 million (4 per cent) impact on Sembcorp’s financial year 2023F (forecasted) core profit,” wrote analysts Lim Siew Khee and Izabella Tan.

“We think the negative share price reaction is overdone and see buying opportunity if weakness persists.”

Assuming flattish earnings per share during the current financial year, they reiterated their 12-month target price of $6.20 for the stock.