Sembcorp Industries - Phillip Securities 2022-11-15: Acquisition Of Another 1.38GW Of Renewable Assets

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Acquisition Of Another 1.38GW Of Renewable Assets

Sembcorp Industries announced the acquisition of 1.38GW of renewable assets in China and India.
The acquisition of BEI Energy and Vector Green will be accretive to earnings upon completion in 1Q23 as it will be funded by debt and internal cash. China and Indian assets are supported by mid-to long-term power purchase agreements (PPAs) that will ensure stability in earnings and cash flows.

We upgrade Sembcorp Industries to BUY from ACCUMULATE with unchanged target price of $3.68.

Sembcorp Industries announced acquisition of 795MW of solar assets in China and 583MW of renewable assets in India.
- Sembcorp Industries ’s 49%-owned JV Beijing Energy Sembcorp (Hainan) International has entered into share purchase agreements with BEI Energy Development (Beijing) Co., Ltd. to acquire three solar projects, for an initial equity consideration of ~RMB15mil (approximately S$3mil) and future capital injection of up to RMB1,148mil (approximately S$222mil).
- Sembcorp Industries will also acquire 100% of Vector Green Energy for a base equity consideration of ~INR27.8bn (~S$474mil).

The valuation was not disclosed, but management guided that this was done at low double digit P/E. Sembcorp Industries will fund the acquisition through internal cash resources and external borrowings. Completion is expected in 1Q23 and both acquisitions are expected to be accretive to earnings, financials however, were not provided.

The assets in China have PPAs ranging from three to five years. As the power market in China is regulated, this provides greater stability to tariff rates. Management is confident of renewing the PPAs when they become due as the solar assets are located in the south of Hebei Province, one of China’s main energy demand centres. The assets are contracted to the State Grid Corporation of China, a Chinese state-owned electric utility and grid operator.
The Indian assets, which comprise mainly solar assets, are covered by long-term PPAs averaging 19 years. With recent changes to the regulation on the payment of receivables in India, credit quality has improved and the receivables issue has been mostly resolved.

This will bring Sembcorp Industries closer to its 2025 target of 10GW of gross installed renewable capacity. Its acquisition of Vector Green will also bring significant utility-scale solar capacity to its India business.

Sembcorp Industries' shareholders have approved the sale of Sembcorp Energy India Limited (SEIL) to Tanweer Infra fund. We believe management will further deploy the proceeds to grow its renewables portfolio to beyond its 10GW target.
For FY22e, we expect continued high electricity prices in Singapore and India to lift over earnings. We expect Sembcorp Industries to pay out 16 cents of dividends (split between final and special due to the special circumstances for FY22) for FY22e, translating to a ~5.3% dividend yield. See Sembcorp's Dividend History.

Sembcorp Industries’s environmental score of 1.28 still lags behind its peers according to data from Bloomberg. We believe the Group’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.

Our earnings forecast for Sembcorp Industries are unchanged and our target price for Sembcorp is maintained at $3.68, still based on 1.2x P/BV, the average of its peers. But we upgrade to BUY due to the recent pull back in Sembcorp's Share Price.

Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2022-11-15

SGX Stock Analyst Report BUY UPGRADE ACCUMULATE 3.680 SAME 3.680