Sembcorp Industries - UOB Kay Hian 2022-04-18: Busy Adding To Its Renewables Portfolio


Sembcorp Industries - Busy Adding To Its Renewables Portfolio

  • Since the announcement of its intention to move from brown to green energy, Sembcorp Industries has been very active on the business development front with over S$1b worth of deals done in China alone. Apart from China, Sembcorp Industries has also signed up to another six renewables deals in Asia as well as in the UK, with likely more to come.
  • Sembcorp Industries remains a key blue-chip holding in any Singapore portfolio in our view. Maintain BUY.

Active on the business development front.

  • In the past six months, Sembcorp Industries (SGX:U96) has been notably active on the business development front with nearly one deal every month since Jul 21. Importantly, all of these deals have been focused on expanding Sembcorp Industries’s renewables footprint as can be seen in the table in the PDF report attached below. We believe the company will remain busy with more renewables deals for the remainder of 2022.
  • Well on target to build up its green energy portfolio. While a number of the projects above are still in the planning stage, we highlight that Sembcorp Industries has built up its renewables portfolio quite aggressively from 2.6GW gross installed capacity at the start of 2021 to 5.3GW at present – this excludes another 1.1GW that is currently under development. Thus, we believe that the company is on target to achieve its plans of increasing its renewable capacity to 10GW by 2025. In Oct 21 and Apr 22, Sembcorp Industries raised a total of S$975m in sustainability-linked notes, all of which were well subscribed and thus underlining the market's confidence in the company’s strategy.

Conventional power assets – Not great for Sembcorp’s ESG score but solid returns at present.

  • While Sembcorp Industries has plans to reduce the contribution of its conventional 85% of Semborp Energy India Limited’s (SEIL) 2.6GW capacity will be under mid-or long-term contracts. This puts Sembcorp Industries’s India business in a stronger position financially in 2022, and more importantly has made its India thermal portfolio more attractive to potential acquirers. Going forward, Sembcorp Industries has stated that it will look to sign more PPAs to ensure 100% coverage for its P2 asset.

ROE expansion in Sembcorp’s renewables business.

  • A key aspect to look out for in Sembcorp Industries’s results going forward is the ROE for its renewables business. Its 2021 results show an ROE of 4.6%. However, this is expected to increase as these assets mature.
  • Currently, with an average age of 4-5 years for its renewables assets, an ROE of around 5-7% is to be expected. However as assets mature and earnings and cashflow contribution increases, coupled with the paying down of project debt, ROE is expected to trend up to 10% and head northwards to 20% as they get older.

We upgrade Sembcorp's earnings forecast for 2022-24

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-04-18
SGX Stock Analyst Report BUY MAINTAIN BUY 3.59 UP 2.950