Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-09-04: Milking The Renewable Energy Play In India

Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-09-04: Milking The Renewable Energy Play In India SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries (SCI SP) - Milking The Renewable Energy Play In India

  • Sembcorp Industries (SCI)’s acquisition of the remaining 28% stake in Sembcorp Green Infra (SGI) for S$301m represents an attractive acquisition for a profitable renewables portfolio. 
  • Recent transaction multiples indicated that the deal was done at a 24% discount to peers’ historical EV/EBITDA, with forward multiples implied at a > 20% discount. 
  • Earnings forecasts have been adjusted by 1-4% on the revised stake, translating to a higher target price of S$3.59 (previous: S$3.57). Maintain BUY.



WHAT’S NEW


Boosts stake in SGI to 100%. 

  • Sembcorp Industries (SCI) announced on Thursday that it was acquiring the remaining 28% stake in Sembcorp Green Infra (SGI) from IDFC Private Equity Fund III (IDFC) for INR14,102m (~S$301m). SCI will own 100% of SGI post this transaction. 
  • We understand from management that the price was a mutually agreed value based on the shareholders’ agreement entered into by both parties when SCI acquired its first stake in 2015.

Internally funded; deal completion expected in 1Q18. 

  • The deal is expected to be completed in 1Q18, and will be funded using internal sources such as proceeds from its MTN issuances.


STOCK IMPACT


Acquired at a 24% discount to peers’ historical EV/EBITDA. 

  • Based on past transactions in the last 12-15 months (see table overleaf), the acquisition is at a 24% discount to peers on an EV/EBITDA basis, and at a 7% discount to peers on a EV/MW basis. Acquisitions in the renewable space are typically evaluated on a EV/EBITDA and Enterprise Value (EV) per Installed MW (EV/MW) basis. Taking into account the total equity invested in SGI to date, the deal implies an equity value of ~S$680m, and net debt of ~S$950m.

2018 earnings growth presents even more compelling acquisition multiples. 

  • With earnings contribution from its 250MW Tamil Nadu plant to contribute to earnings in 2018- 19, earnings on a 100% basis are expected to grow at least 15% yoy in 2018. Based on EY’s Power Transactions and Trends Q2 2017, renewables in Asia-Pacific are trading at a forward EV/EBITDA multiple of 8.4x on average. 
  • On our estimates, the forward EV/EBITDA multiple at which SCI acquired the remaining SGI stake implies more than 20% discount, making it a good deal.


EARNINGS REVISION/RISK


Revising 2017-19 earnings forecasts by 1-4%. 

  • We have adjusted our earnings forecasts to reflect the change in stake from this acquisition, and have made some adjustments to the timing of capacities coming on-stream. 
  • Our revised earnings forecasts for 2017-19 are S$378m (-4%), S$484m (+1%) and S$538m (+1%) respectively.


VALUATION/RECOMMENDATION


Maintain BUY, with a higher target price of S$3.59. 

  • The incorporation of SCI’s additional stake in SGI results in our target price rising slightly from S$3.57 to S$3.59.
  • Our valuation is based on a SOTP of its utilities and marine businesses, with the 1-year forward PE multiple for its utilities business tied to the trading multiples in its respective geographies. This translates to a blended 10.1x 1-year forward PE, a 17% discount to its Asia-Pacific ex-Japan peers. 
  • While India is facing some short-term headwinds, we expect it earnings story to pan out in the long-term. Its core Singapore utilities earnings have largely bottomed out, and Sembcorp Industries' share price has largely priced in the negatives from its overseas operations. 
  • Maintain BUY.




Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-09-04
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.590 Up 3.570



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