Sembcorp Industries – Acquisition of another 1.38GW of renewable assets November 15, 2022 235

PSR Recommendation: BUY Status: Upgraded
Last Close Price: 3.25 Target Price: 3.680
  • Sembcorp Industries (SCI) announced the acquisition of 1.38GW of renewable assets in China and India.
  • The acquisition of BEI Energy and Vector Green will be accretive to earnings upon completion in 1Q23 as it will be funded by debt and internal cash.
  • China and Indian assets are supported by mid- to long- term power purchase agreements (PPAs) that will ensure stability in earnings and cash flows.
  • We upgrade to BUY from ACCUMULATE with unchanged target price of $3.68. Our earnings are unchanged and our target price is maintained at $3.68, still based on 1.2x P/BV, the average of its peers. But we upgrade to BUY due to the recent pull back in its share price.

 

The news

SCI announced acquisition of 795MW of solar assets in China and 583MW of renewable assets in India.

 

SCI’s 49%-owned JV Beijing Energy Sembcorp (Hainan) International has entered into share purchase agreements with BEI Energy Development (Beijing) Co., Ltd. to acquire three solar projects, for an initial equity consideration of ~RMB15mn (approximately S$3mn) and future capital injection of up to RMB1,148mn (approximately S$222mn).

 

SCI will also acquire 100% of Vector Green Energy for a base equity consideration of ~INR27.8bn (~S$474mn).

 

The Positives

+ Acquisition of BEI Energy and Vector Green will be accretive to earnings. The valuation was not disclosed, but management guided that this was done at low double digit P/E. SCI will fund the acquisition through internal cash resources and external borrowings. Completion is expected in 1Q23 and both acquisitions are expected to be accretive to earnings, financials however, were not provided.

 

+ China and Indian assets supported by mid- to long- term PPAs. The assets in China have PPAs ranging from three to five years. As the power market in China is regulated, this provides greater stability to tariff rates. Management is confident of renewing the PPAs when they become due as the solar assets are located in the south of Hebei Province, one of China’s main energy demand centres. The assets are contracted to the State Grid Corporation of China, a Chinese state-owned electric utility and grid operator.

 

The Indian assets, which comprise mainly solar assets, are covered by long-term PPAs averaging 19 years. With recent changes to the regulation on the payment of receivables in India, credit quality has improved and the receivables issue has been mostly resolved.

 

+ The two acquisitions will bring the Group’s gross renewable energy capacity to 8.5GW. This will bring it closer to its 2025 target of 10GW of gross installed renewable capacity (Figure 1). Its acquisition of Vector Green will also bring significant utility-scale solar capacity to its India business.

 

Outlook

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 over earnings. We expect SCI 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.

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About the author

Profile photo of Terence Chua

Terence Chua
Senior Research Analyst
Phillip Securities Research

Terence specialises in the consumer, conglomerate and industrials sector. He has over five years of experience as an analyst in the buy- and sell-side. As an institutional fund management analyst, he sat on the China-Hong Kong desk. Terence was ranked top 3 for Best Analyst under the small caps and energy category in the Asia Money poll 2018.

He graduated from the Singapore Management University with a major in Finance (Honours), and is the honoured recipient of the CFA scholarship.

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