Sembcorp Industries - Phillip Securities 2022-11-22: Equity Fundraising Ruled Out

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Equity Fundraising Ruled Out

Sembcorp Industries (SGX:U96) announced the acquisition of 830MW of renewable assets in China through a joint venture with State Power Investment Corporation (SPIC).
The acquisition of BEI Energy and Vector Green will be accretive to earnings and diversifies the Group’s presence from north western China.
Management ruled out equity funding to finance spate of acquisitions. We believe the latest clarification will allay concerns over an equity call.

We maintain BUY rating on Sembcorp Industries with unchanged target price of $3.68.

Sembcorp Industries announced the acquisition of 830MW of renewable assets in China through a joint venture with SPIC. Xingling New Energy owns a portfolio of wind and solar assets.
Sembcorp Industries has signed definitive agreements with Wuling Power, an affiliated company of SPIC, to acquire a 43.5% interest in Hunan Xingling New Energy for a total equity consideration of ~RMB1,058mil (~S$204mil).
Wuling Power holds the remaining 54.7% interest in Xingling New Energy.

The valuation was not disclosed, but management guided that similar to its acquisition of BEI Energy and other acquisitions, 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 1H23 and the acquisition is expected to be accretive to earnings. Financials however, were not provided.

The acquisition of Wuling Power will solidify the Group’s presence in central China, Hunan. According to management, Hunan is currently importing 90% of coal outside with reserve margin at less than 20%. As such, this makes power generation in Hunan a valuable prospect. The assets are also relatively new at 4.9 years, we estimate that IRR of the project is ~11-12%.
Importantly, the acquisition of a 54.7% stake in Xingling New Energy also allow the Group to broaden its partnership with SPIC in renewables and green energy.

With the Group within touching distance of its 10GW target ahead of its 2025 target. We believe Sembcorp Industries will provide an update to its target in its FY22 results.

Amid concerns over funding requirements following Sembcorp Industries’s spate of renewable energy acquisitions, management has affirmed its intention to stick to its previously stated guidance of ensuring that there will be no equity fundraising to hit its 10GW target.
While net debt/equity will go towards 1-2x post-acquisition, we believe Sembcorp Industries will use the cash flows from these newly acquired assets to pay down the debt to reach its optimal gearing target of 1.3x. We believe the latest clarification will allay concerns of an equity call.

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 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.

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. The Group 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.

Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2022-11-22

SGX Stock Analyst Report BUY MAINTAIN BUY 3.680 SAME 3.680