Sembcorp Industries - UOB Kay Hian 2022-10-27: A Sunny Future – Retain Our Positive Outlook


Sembcorp Industries - A Sunny Future – Retain Our Positive Outlook

  • Sembcorp Industries’s sale of its Indian coal assets was a key talking point at a recent investor call. The fact that the company was able to sell these assets at a premium vs comparable transactions, and in a climate of anti-coal sentiment, was a notable achievement in our view.
  • Sembcorp Industries continues to be on the lookout for M&A opportunities in the renewables space with its recent solar tender win in Singapore being another success in 2022.

Investor call assuaged some concerns over the recent sale of its Indian coal assets.

  • We recently held a call between Sembcorp Industries (SGX:U96) and Asian investors with one of the major talking points being Sembcorp Industries’s recent sale of coal-fired power plants within Sembcorp Energy Indial (SEIL). The key takeaway for us was that the pricing of these assets at slightly over 1.0x P/B was a premium to comparable transactions at 0.2-0.6x P/B: should SEIL have been sold at these levels, Sembcorp Industries would have had to impair its book by > S$800m.
  • The external environment has not been conducive for coal-based assets in the past few years as ESG concerns have taken hold. Sembcorp Industries also highlighted that bank financing was not available to many interested parties in SEIL given the nature of these assets. In addition, the company revealed that it had attempted to work on a transaction with the World Bank’s International Finance Corp as well as the Asian Development Bank; however no workable solution was found. Note that shutting down these assets was not an option given their integral position as power producers and employers in their respective states. Thus the fact that Sembcorp Industries was able to sell these high quality assets (relatively low CO2 emissions, and only 5- 6 years old) is a major achievement in our view.
  • Solving the unpaid receivables problem in India, thus strengthening SEIL’s financial position. A key recent development has been the Indian central bank’s funding of the Telangana and Andhra Pradesh distribution companies to repay S$700m worth of receivables to Sembcorp Industries. Thus, agreements have been inked to repay the respective receivables on a monthly basis over the course of the next 12-48 months.

Will Sembcorp’s ESG score improve as a result of the SEIL sale?

  • According to Sembcorp Industries's management, it has been in regular dialogue with the ESG rating agencies since the sale of its coal assets. It believes that on a Scope 1 & 2 basis, SEIL will not be accounted for and thus it will see an improvement in its ESG score. However, much hinges on how the rating agencies view the Deferred Payment Note, ie whether this is classified as a loan or an investment, and how that could impact Scope 3 ESG ratings.

M&A market has calmed down.

  • Sembcorp Industries stated that while it is still in the market for renewables assets, it has ruled out any equity raising to support this, and importantly is not looking for a company-changing deal like what other Temasek-linked entities are currently doing.
  • Management observed that while competition was intense (e.g. using aggressive assumptions for power prices and utilisation rates) when rates were low, the market has become a lot more rational in the past six months.
  • In India, Sembcorp Industries remains keen on 400-600MW renewables assets.

New solar expansion in Singapore.

  • Sembcorp Industries recently announced that it had been awarded the SolarNova 7 project by the Housing & Development Board (HDB) and the Singapore Economic Development Board. This project involves the installation of 75MWp of solar capacity across 1,290 HDB blocks and 99 government sites. The 1,290 blocks, which will be located in areas under the Bishan-Toa Payoh, Tanjong Pagar and Jurong-Clementi Town Councils, will have a combined solar capacity of 50.5MWp.
  • As of end-3Q22, Sembcorp Industries’s gross solar capacity stands at 535MWp.

Sembcorp – Earnings forecast revision and recommendation

  • Maintain BUY on Sembcorp with a target price of S$4.10 which is based on a target P/E multiple of 13.8x. This target P/E multiple is 1 standard deviation above the company’s past 5-year average P/E of 9.7x (excluding 2020 where the company reported impairment-related losses) and applied to our 2023 EPS estimate.
  • We continue to foresee an upward re-rating of Sembcorp’s valuation multiples due to the scarcity value of solid ESG companies in Singapore, and as Sembcorp continues to build out its green energy portfolio.
  • Sembcorp has recently witnessed share price weakness (-19% since its high of S$3.48 in early-Sep 22) which we attribute to it being one of the top share-price performers in Singapore and as a result it succumbed to profit-taking during a period of market volatility. Despite this, Sembcorp's Share Price has easily outperformed year-to-date, rising 40% vs the STI’s 4% decline.
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  • Our enthusiasm for the stock has increased as a result of the share-price pullback and we point to the company’s inexpensive 2023 P/E and P/B multiples of 9.5x and 1.1x respectively. Sembcorp Industries remains our top pick in Singapore for the quality of its earnings as well as its growth prospects in the near to medium term.
  • Catalysts:
    • Sustained economic recovery after the peak of COVID-19, thus leading to increased energy and utilities usage.
    • Positive EPS revision momentum as the street upgrades earnings in 2H22.
    • Continued high electricity prices in Singapore, the UK and India.
    • Earnings-accretive acquisitions in the renewables energy space.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-10-27
SGX Stock Analyst Report BUY MAINTAIN BUY 4.100 SAME 4.100