Sembcorp Industries - DBS Research 2022-09-06: Divestment Of SEIL; A Quantum Leap In Decarbonisation

• Sembcorp Industries (SGX:U96) is selling 100% of its shares in Sembcorp Energy India Limited (SEIL) that owns two coal-fired plant totaled 2,640 MW in India, to Tanweer Infrastructure Pte. Ltd. (the “Tanweer”).
• Tanweer is a consortium led by Oman Investment Corporation S.A.O.C. (70%), Ministry of Defence Pension Fund, Oman (20%) and Dar Investment SPC (10%).
• The consideration for the SEIL sale is INR117,338m (approximately S$2,059m), subject to certain adjustments. The base purchase price is 1.0x of SEIL’s book value as of 30 June 2022. Sembcorp is expected to register a small disposal gain of S$11m upon completion.
• While power companies in India might have re-rated to above book valuation, transactions of thermal power plants remain at steep discounts to book. Hence, Sembcorp’s proposed divestment of SEIL at book is deemed commendable.
• On completion, Tanweer will settle the entire consideration via a facility provided by Sembcorp under a Deferred Payment Note (DPN). The DPN will bear interest at a rate equal to Indian government’s 10-year bond yield spot rate plus 1.8%, minus a greenhouse gas (GHG) emissions intensity reduction incentive rate (GHG Reduction Incentive Rate) of 180bps, for 15-years.
• DPN income (post tax) for Sembcorp is expected to be ~S$158m for 2022 on proforma basis, thus mitigating the loss of income from the two power plants, which were projected to be S$140-180m p.a. on a normalised basis.

Stable financial metrics post transaction

• Sembcorp's pro forma net profit for 1H22 would be reduced by a mere 4.5% post transaction, while book value is largely intact. Debt / EBITDA would decline slightly from 5.0x to 4.9x. Debt level would decrease by S$1.6bn to S$7.1bn after deconsolidation of SEIL.
• Besides shareholders’ approval and relevant authority/regulatory clearance, Sembcorp will be required to obtain written consent from lenders and relevant counterparties i.e. the power distribution company. Management is confident to obtain the relevant approvals and clearance. Lender and Counterparties should find comfort with the reputable profile of Tanweer, Sembcorp’s support on technical expertise post transaction, and the DPN arrangement.
• Timeline: Circular should be dispatched in Oct-2022 before the EGM in Nov-2022. Target completion within 6-months from EGM, i.e. by May-2023.

Accelerates Sembcorp's Brown to Green transformation

• Post divestment, the percentage of Sembcorp's power capacity share from renewables will be lifted from 43% to 51% as of end Jun 2022 on proforma basis. The percentage share of profit from sustainable solutions in 1H22 would also be raised from 25% to 31%. GHG Emissions Intensity (tCO2e/MWh) is expected to head lower from 0.51 to 0.32, ahead of its target of 0.4 by 2025.
• The debt headroom freed up and payment received from DPN will be redeployed towards renewable investments.
• The positive development should move Sembcorp's share price closer to our target price of S$3.80. Reiterate BUY.