SEMBCORP INDUSTRIES LTD (SGX:U96)
Sembcorp Industries - Greener Than Ever
- Sembcorp (SGX:U96) has eased ESG concerns by the sale of Sembcorp Energy India Limited (SEIL) to Tanweer Infra fund for S$2.1b via a 15-year deferred payment note (DPN). Tanweer Infrastructure Fund is indirectly owned by a consortium of private equity investment firms Oman Investment Corporation (OIC) in partnership with the Ministry of Defence Pension Fund.
- We think that this sale is positive on a pro-forma basis given it is strategically imperative for Sembcorp to progress towards being a greener company, while keeping earnings stable and its balance sheet strong.
Deferred payment note (DPN) to promote acquisition
- The divestment value of S$2.1b implies annualised 2022F P/E of 10.2x and P/NTA of 1.03x, which we view as fair given the current market environment for coal-related assets. The price will be settled through a deferred payment note (DPN) over an initial 15 years, with an extension of up to 24 years.
- The DPN will bear interest at a annum rate equal to 1.8% plus the Indian government 10-year bond yield spot rate (currently 7.2%), minus a greenhouse gas (GHG) emissions intensity reduction incentive rate. This means for every 1% of reduction in GHG intensity by the buyer, the interest rate is cut by 9bp subject to a maximum reduction of 20%.
Shareholder value preserved
- Sembcorp Energy India Limited (SEIL) generated net profit of ~S$102m in 1H22. With the DPN structure, earnings from its coal plants would be converted into a form of vendor financing, in our view. Assuming an average interest rate of 8% per annum, Sembcorp would receive approximately S$150m of cashflow per year from DPN, pretty comparable to profits of S$40m per year from 2019- 2021 from the two coal power plants.
- In a nutshell, the divestment of the coal power plants would not result in any major disruption to Sembcorp’s profits. The deconsolidation of SEIL would improve Sembcorp’s pro-forma net gearing for 1HFY22 to 1.37x from 1.75x while improving cashflow.
Full steam into renewables; maintain BUY on Sembcorp
- Sembcorp's management has pledged that the proceeds will be deployed to grow its renewables portfolio to 10GW target (FY21: 7.1GW) by FY25.
- Refer to the report attached below for detailed figures of our revised earnings and forecast for Sembcorp. Excluding contributions from SEIL, our FY22/23 earnings forecast for Sembcorp is cut by 12%/37% and our SOTP-based target price for Sembcorp is reduced to S$4.00 from S$4.50.
- See
- Key catalyst: EPS revision as the street revise earnings for 2H22, continued high electricity prices in Singapore/India and potential earnings accretive acquisitions in the renewables energy space.
Kelvin TAN
Maybank Research
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https://www.maybank-ke.com.sg/
2022-09-08
SGX Stock
Analyst Report
4.000
DOWN
4.500
