Sembcorp Industries – Equity fundraising ruled out November 22, 2022 224

PSR Recommendation: BUY Status: Maintained
Last Close Price: 3.25 Target Price: 3.680
  • Sembcorp Industries (SCI) announced the acquisition of 830MW of renewable assets in China through a joint venture with State Power Investment Corporation (SPIC).
  • The acquisition of BEI Energy and Vector Green will be accretive to earnings and diversifies the Group’s presence from north western China.
  • Management ruled out equity funding to finance spate of acquisitions. We believe the latest clarification will allay concerns over an equity call.
  • We maintain BUY with unchanged target price of $3.68. Our earnings are unchanged while our target price is maintained at $3.68, still based on 1.2x P/BV, the average of its peers.

 

The news

SCI announced the acquisition of 830MW of renewable assets in China through a joint venture with SPIC. Xingling New Energy owns a portfolio of wind and solar assets.

 

SCI has signed definitive agreements with Wuling Power, an affiliated company of SPIC, to acquire a 43.5% interest in Hunan Xingling New Energy for a total equity consideration of ~RMB1,058mn (~S$204mn).

 

Wuling Power holds the remaining 54.7% interest in Xingling New Energy.

 

The Positives

+ Acquisition of Xingling New Energy will be accretive to earnings. The valuation was not disclosed, but management guided that similar to its acquisition of BEI Energy and other acquisitions, 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 1H23 and the acquisition is expected to be accretive to earnings. Financials however, were not provided.

 

+ Acquisition diversifies Group’s presence from north western China. The acquisition of Wuling Power will solidify the Group’s presence in central China, Hunan. According to management, Hunan is currently importing 90% of coal outside with reserve margin at less than 20%. As such, this makes power generation in Hunan a valuable prospect. The assets are also relatively new at 4.9 years, we estimate that IRR of the project is ~11-12%.

 

Importantly, the acquisition of a 54.7% stake in Xingling New Energy also allow the Group to broaden its partnership with SPIC in renewables and green energy.

 

+ The acquisition of Xingling New Energy will bring the Group’s gross renewable energy capacity to 9.4GW. With the Group within touching distance of its 10GW target ahead of its 2025 target (Figure 1). We believe the Group will provide an update to its target in its FY22 results.

 

+ Management ruled out equity funding to finance spate of acquisitions. Amid concerns over funding requirements following the Group’s spate of renewable energy acquisitions, management has affirmed its intention to stick to its previously stated guidance of ensuring that there will be no equity fundraising to hit its 10GW target. While net debt/equity will go towards 1-2x post-acquisition, we believe the Group will use the cash flows from these newly acquired assets to pay down the debt to reach its optimal gearing target of 1.3x. We believe the latest clarification will allay concerns of an equity call.

 

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 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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