SEMBCORP INDUSTRIES LTD (SGX:U96)
Sembcorp Industries - Season Of Ploughing Renewable Energy
- We believe the impairment of Sembcorp Industries’s entire equity stake in ChongQing (CQ) coal power plant leaves it options to decarbonise/divest other such assets.
- Key difference between India coal and ChongQing coal is their outlook. The former could still see potential for long-term Power Purchase Agreements (PPAs); hence, no impairment needed.
- Sembcorp Industries secured 105MW renewable projects in Singapore and Vietnam in 1H21, in line with its expansion, though the pace is stalled by lockdown. Maintain Add.
Why impair Chongqing and not India?
- Sembcorp Industries (SGX:U96) impaired the entire carrying value of S$212m in ChongQing SongZao in 1H2021. This is a mine-mouth coal-fired power plant in ChongQing built next to the coal mines owned by its JV (ChongQing Energy Investment Group), to take advantage of low-cost fuel. The coal mines were closed in Jan following government directive. Since then, Chongqing Songzao has had to procure coal from other provinces and has been severely affected by rising coal cost. As the region is surrounded by alternative renewable energy sources from SzeCHuan and GanSu, the plant’s long-term prospects are also being challenged.
- The impairment could be read positively as it leaves Sembcorp Industries the option to divest/decarbonise its other coal-fired plants (total capacity: 1,320MW), taking it one step closer to meet its target of having a 70% green portfolio by 2025.
- Meanwhile, Sembcorp Industries is still hopeful of securing long-term Power Purchase Agreements (PPA) for SEIL 2.
- Management in its analyst call said there could be projects up for bids in India that require a combo of renewable and conventional energy, for which Sembcorp Industries is well equipped. Therefore, one may view potential impairment (if any) of its India coal plants as risk/reward.
Ploughing season for renewable energy
- Sembcorp Industries's 1H21 renewables revenue rose 7% y-o-y to S$146m, thanks to increased solar capacity in Singapore to 80MW (from 50MW in 1H20), and new capacity in solar and smart energy in Vietnam (10MW in total). This is offset by lower wind energy generated in India (-2% y-o-y), which also contributed to a 27% y-o-y reduction in net profit from renewables to S$24m.
- However, management is positive on Sembcorp Industries’s UK battery storage business (60MW) which has been performing well in the dynamic containment service market. We had previously expected a loss in UK.
- In 1H21, Sembcorp Industries installed 78MW of renewable energy capacity; another ~87MW of renewable energy capacity will come onstream by end-2021, it said. In 1H21, Sembcorp Industries secured 105MW of solar power projects in Singapore (85MW) and Vietnam (20MW). The pace of new contract/investment was slightly stalled by lockdowns in 2Q21.
Maintain ADD, raise target price for Sembcorp Industries to S$2.51
- Sembcorp Industries declared an interim dividend of S$0.02 (nil in 1H20). We raise our earnings per share forecast for Sembcorp Industries by 29% to reflect its strong performance in India and Singapore in 1H21, and higher UK earnings ahead as well as lower corporate costs.
- Our target price for Sembcorp Industries, still based on 15x CY22F P/E (close to ex US/European peers), rises slightly to S$2.51.
- See
- Decarbonisation of conventional energy assets and the securing of renewable energy contracts are key potential re-rating catalysts.
- Downside risks: unfavourable regulatory changes and sizeable impairment.
LIM Siew Khee
CGS-CIMB Research
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https://www.cgs-cimb.com
2021-08-06
SGX Stock
Analyst Report
2.51
UP
2.430
