SEMBCORP INDUSTRIES LTD (SGX:U96)
Sembcorp Industries - Strategically Important Sale Of SEIL
- Acquisition consideration of S$2.059bn implies S$0.8bn/GW of gross installed capacity, which is higher than average comparable transactions of S$0.5-1bn/GW. We view the transaction as fair given the weak market environment for coal assets.
- Sembcorp's debt-capitalisation ratio to improve to 62% from 66% for pro forma 1H22. We believe Sembcorp will leverage its balance sheet and re-invest the proceeds into green assets.
- We upgrade Sembcorp to ACCUMULATE from NEUTRAL with higher target price of $3.68 (previously $3.27). We lower FY23e PATMI by 11% as we strip out SEIL’s contribution and lower contribution from urban developments. Our target price is raised to $3.68, still based on 1.2x P/BV, the average of its peers as we roll forward estimates to FY23e.
- Sembcorp will still be exposed to operational risks of Sembcorp Energy India Limited (SEIL) after the sale through its 15-year exposure to the Deferred Payment Note (DPN).
Terms and conditions of Sembcorp's proposed sale of SEIL
- Sembcorp announced the proposed sale of SEIL for the equivalent of $2.059bn, or 1x NAV. The purchaser is the Tanweer Consortium led by Oman Investment Corporation S.A.O.C (OIC), the Ministry of Defence Pension Fund, Oman (MODPF) and Dar Investment SPC (Dar Investment).
- On completion, Tanweer Consortium will settle the entire final purchase price through the DPN via a facility provided by Sembcorp under the DPN. The DPN will bear interest at 9% interest (1.8% spread + 7.2% benchmark), minus a greenhouse gas (GHG) emissions intensity reduction incentive rate. This GHG reduction incentive rate is subject to a cap of 180 basis points if these emission targets are met. In other words, the current spread over the benchmark rate will be removed or reduced any time within the 15-year period if the Tanweer Consortium can meet the GHG emissions target. Such adjustments will affect the final purchase price.
- All outstanding payment under the DPN should be payable in full on the 15th anniversary date of the completion, which is also the maturity date. The yearly payments will be recorded under Sembcorp’s EBITDA section. Should the outstanding payment obligations not be met, the maturity date will be extended for two years, and for every two years till the monies are paid. The maturity date will not be extended beyond the 24th anniversary date of completion.
- Shareholders approval is required for the transaction, which is expected in November this year, and the expected completion is six months after EGM.
The Positives
Acquisition consideration implies S$0.8bn/GW of gross installed capacity, higher than average comparable transactions of S$0.5-1bn/GW.
- The acquisition price implies 1x of NTA, which we view as fair given the weak market environment around coal-related assets. Sembcorp will recognise ~S$11mil in gains from the sale.
Debt-capitalisation ratio improve to 62% from 66% for pro-forma 1H22.
- We believe Sembcorp will leverage its stronger balance sheet to further its transition to green energy.
- On a pro forma basis, Sembcorp’s total debt as at 30 June 2022 will decrease to $7.1bn from $8.7bn due to the deconsolidation of SEIL in Sembcorp's balance sheet. Sembcorp’s interest paying capacity will also improve with interest coverage rising to 6.3x in the same period from 5.1x.
- Sembcorp still has ~$5bn of borrowing facilities to tap on, which will accelerate the transformation of its portfolio from brown to green.
$700mil in receivables from SEIL expected to be repaid within the next 24-48 months.
- The Indian Ministry of Power has recently directed Telangana and Andhra Pradesh to settle the overdue receivables within 20-48 months. Should this be adhered to, the Group is expected to receive ~$700mil in receivables in the next 1-2 years, which will lower the credit risk of SEIL, and by extension the risk for the DPN.
The Negatives
Sembcorp will still be exposed to operational risks of SEIL for at least 15 years after sale.
- Even though SEIL will be deconsolidated from Sembcorp’s books after the sale, the DPN, which is a form of vendor financing means that Sembcorp will still be exposed to the operational risks of SEIL for at least 15 years after the sale. Should the outstanding payment obligations not be met, the maturity date will be extended for two years, and for every two years till the monies are paid. The maturity date will not be extended beyond the 24th anniversary date of completion.
- However, we believe this risk is mitigated by both mid-and long-term contracts for SEIL, totalling 85% of SEIL’s thermal plant capacity. SEIL will have 570MW up for renewal in 2024 (22% of the power purchase agreement). That said, we view the risk of non-renewal as low given the strong current energy environment. IEX prices remain elevated at ~7,500 Rupees/hr in September vs an average ~7,600 Rupees/hr in 1H22.
Sembcorp - Outlook
- Shareholders approval is required for the transaction, which is expected in November this year, and the expected completion is 6 months after EGM.
- For dividends, we model a ~30% payout ratio, in line with FY21’s payout. We expect Sembcorp to pay out 16 cents of dividends (split between final and special due to the special circumstances for FY22) for FY22e, translating to a ~4.9% dividend yield
Sembcorp - ESG
- The sale of SEIL will accelerate Sembcorp’s transformation to have more of its net profit come from sustainable solutions. As such, we view the transaction as strategically important to the Group’s transformation plans (% share of net profit from sustainable solutions will rise to 31% for pro forma 1H22 vs 25% previously).
- Sembcorp’s environmental score of 1.28 still lags behind its peers according to data from Bloomberg. We believe Sembcorp’s transition from brown to green has the potential to lift its environmental score rating over time.
- Sembcorp has committed to grow its profit contribution from its sustainable solutions to 70% by 2025 (35% in 2021), which could see greater interest from institutional investors looking for high ESG ranked companies.
Upgrade Sembcorp to ACCUMULATE with higher target price
Terence Chua
Phillip Securities Research
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https://www.stocksbnb.com/
2022-09-07
SGX Stock
Analyst Report
3.68
UP
3.270
