Sembcorp Industries - UOB Kay Hian 2022-11-15: Full Steam Ahead With Two Renewables Acquisitions


Sembcorp Industries - Full Steam Ahead With Two Renewables Acquisitions

  • Sembcorp announced the acquisition of 390MW of net solar assets in China and a portfolio of 583MW of solar and wind assets in India. On a gross installed capacity basis, this would increase the company’s capacity from 7.2GW to 8.5GW which is not far from its 2025 target of 10GW.
  • Sembcorp Industries disclosed that these assets were bought at “low teens P/E multiples” which we view as fair.
  • Maintain BUY on Sembcorp Industries (SGX:U96). Target price: S$4.10.

Sembcorp is expanding its solar capacity in China.

  • On 11 Nov 22, Sembcorp announced that its 49%-owned JV would acquire 795MW of operational solar assets in Hebei, China, for a total consideration of RMB1.163b (or S$225m) – this comprises an initial equity consideration of RMB15m (S$3m) followed by a subsequent capital injection of RMB1.148b (S$222m).
  • This acquisition will be funded by internal cash resources and external borrowings with estimated completion in 1Q23.

Diversifying its renewables portfolio in India.

  • On 14 Nov 22, Sembcorp announced the acquisition of 100% equity interest in Vector Green Energy which owns a portfolio of solar and wind assets for INR27.8b (S$474m). The acquisition will be funded through internal cash resources and external borrowings with expected completion in 1Q23.
  • The renewable power generation assets span across 13 states in India and comprise 64MW solar projects under development, and 495MW of operational solar capacity and 24MW of operational wind capacity.

Moving the company closer to its goal.

  • The acquisitions add over 1.3GW of gross installed renewables capacity to Sembcorp’s portfolio and bring its current total to 8.5GW and a bit closer to its 10GW renewables target by 2025. Importantly, as both the Chinese and Indian acquisitions are currently operational, they will be immediately earnings-accretive in 2023.

Key positives of Sembcorp's China acquisition.

  • Sembcorp’s partner in the JV that is acquiring the three solar projects is Beijing Energy International (BEI) which is wholly-owned by China’s State-owned Assets Supervision and Administration Commission (SASAC) of the State Council. With this strong partner, Sembcorp appears well placed to continue its long-term growth in China.
  • Importantly, the three projects in south Hebei (which only started operations in Sep 22) are located in a tight power market where reserve margins are < 10% and thus needs to import around 30% of its power consumption. In addition, its proximity to Beijing means that no coal power plants can be set up due to pollution concerns and thus curtailment risk is very low.

Key positives of Sembcorp's India acquisition.

  • Prior to the announced acquisition, Sembcorp’s Indian renewables portfolio was 95% wind; however after the acquisition, this would become 65:35 wind and solar, thus rebalancing its portfolio and arguably bringing stability into it. In addition, the operational solar projects are subject to Power Purchase Agreements with remaining life of another 19 years, while the smaller 24MW wind asset does not have one.
  • Sembcorp also highlighted that the credit quality in India has improved markedly in the past 12 months as all receivables are being paid on time, with non-paying customers being disconnected from the IEX.

Longer-term growth plans in green hydrogen production.

  • On 25 October, Sembcorp entered into strategic partnerships with the Japanese government and various companies to explore hydrogen and other decarbonisation initiatives. These include:
    1. an MOU with Japan Bank for International Cooperation (JBIC) to assist Sembcorp in its hydrogen project,
    2. MOU with Sojitz Corporation for green hydrogen production, battery energy storage and net zero industrial parks, and
    3. MOU with IHI Corporation to build out an integrated green ammonia supply chain.

Sembcorp – Earnings forecast revision and recommendation

  • Maintain BUY on Sembcorp Industries with a target price of S$4.10 based on a target P/E multiple of 13.6x. This target P/E multiple is 1 standard deviation above the company’s past 5-year average P/E of 10.1x (excluding 2020 where Sembcorp reported impairment-related losses) and is applied to our 2023 EPS estimate.
  • Sembcorp remains one of our top picks in Singapore for the quality of its earnings as well as its growth prospects in the near to medium term.
  • See
  • Catalysts:
    • Sustained economic recovery after the peak of COVID-19, thus leading to increased energy and utilities usage.
    • Positive EPS revision momentum as consensus upgrades earnings in 2H22.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-11-15
SGX Stock Analyst Report BUY MAINTAIN BUY 4.100 SAME 4.100