Sembcorp Industries - Accelerating Net Zero Target; ESG Uplift
- Sembcorp Industries (SGX:U96) is alleviating the ESG concerns over its coal assets by selling its entire 100% stake in Sembcorp Energy India Ltd (SEIL) to Tanweer Infrastructure Pte Ltd (Tanweer) at 1.0x SEIL’s P/BV (as at 30 Jun). See Sembcorp's announcement dated 2022-09-05.
- The total consideration of Rs117,338m (~S$2,059m) will be settled through a deferred payment note (DPN) over an initial period of 15 years, with an extension of up to 24 years. The DPN comes with an annual interest rate of 1.8% (base rate) plus the Indian government 10-year bond yield spot rate (currently at 7.2%), minus a greenhouse gas (GHG) emissions intensity reduction incentive rate. This means for every 1% of reduction in GHG intensity by the buyer, the interest rate would be reduced by 9bp subject to a minimum reduction of 5%.
- SEIL generated net profit of ~S$52m in FY21 and ~S$102m in 1H22. The absence of coal profits would be converted into a form of vendor financing, in our view. Assuming an average interest rates of 8% p.a., we estimate Sembcorp Industries to receive ~S$150m of cashflow per year from DPN, relative to profits of ~S$40m per year from 2019- 2021 from the two coal power plants due to the lack of long-term power purchase agreements (PPAs) for its second plant, SEIL 2.
- In a nutshell, the divestment of the coal power plants would not result in a major dent in Sembcorp Industries’s profits.
- The deconsolidation of SEIL would reduce Sembcorp Industries’s proforma net gearing to 1.37x from 1.75x as of end-1H22.
- We keep our EPS forecasts for Sembcorp Industries for now. We have factored in declines in net profit of 38% h-o-h in 2H22F to S$310m, and 15% y-o-y in FY23F, pricing in potential reduction in energy prices if demand/supply disruption dissipates.
- Sembcorp's share price has outperformed the FSSTI by ~70% year-to-date but we think there is further upside to be reaped given its decarbonisation plans. With the removal of SEIL, we now value Sembcorp Industries based on 12x CY23F P/E.
- In our ESG benchmarking, we had said that successful decarbonisation efforts could lead to premium valuations ascribed to Sembcorp Industries as it is the only pure renewable energy proxy in Singapore.
- Reiterate ADD recommendation on Sembcorp Industries with target price raised to S$4.78. Our target price is based on 10% discount to regional utilities peers’ 14x FY23F P/E. Note that renewable peers are trading at 28x.
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
LIM Siew Khee CGS-CIMB Research | Izabella TAN CGS-CIMB Research | https://www.cgs-cimb.com 2022-09-06 2022-09-06
Previous report by CGS-CIMB:
2022-06-20 Sembcorp Industries - For Watt It’s Worth
Target prices by 4 other brokers at Sembcorp Target Prices.
Listing of broker reports at Sembcorp Analyst Report.
Sembcorp Share Price History,
Sembcorp Dividends & Corp Actions,
Sembcorp News Articles