• Sembcorp Industries (SGX:U96) will sell all of its Indian coal-fired power plants to an Omani party for S$2.1b via a 15-year Deferred Payment Note. The acquisition price implies an annualised 2022F P/E of 10.2x and P/NTA of 1.03x, which we view as largely fair given the current market environment around coal-related assets.
• We view this sale in a favourable light given the strategic imperative for Sembcorp Industries to progress towards being a greener company.

Sembcorp Is Ridding Itself of Brown Energy

• Sembcorp Industries announced that it will sell 100% of Sembcorp Energy India (SEIL), operator of two supercritical coal-fired plants totalling 2.6GW, to Tanweer Infrastructure for a consideration of INR117b or S$2.1b. The acquisition price implies an annualised 2022E P/E of 10.2x and P/NTA of 1.03x, which we view as largely fair given the current market environment around coal-related assets. The price also implies S$0.8b/GW of gross installed capacity, which is towards the high end of comparable transactions of S$0.5 to 1.0b/GW.
• Not cash, but a Deferred Payment Note (DPN). Importantly, Sembcorp Industries will not get cash up front but instead the consideration will be via a 15-year Deferred Payment Note which will bear an interest rate of 1.8% p.a. plus the Indian government 10-year bond yield spot rate, less a greenhouse gas emissions intensity reduction incentive rate.
• Given the materiality of the divestment, Sembcorp Industries will need to convene an EGM by Nov 22 to seek shareholders’ approval with expected completion of the transaction in 2Q23.
• The buyer is Tanweer Infrastructure, which is indirectly owned by a consortium led by the Oman Investment Corporation (OIC), a leading Omani private equity investment company and importantly Sembcorp Industries’s long-term partner in Oman. Both OIC and Sembcorp Industries jointly developed and operated the country’s US$1b Salalah Independent Power and Water Plant since 2009.
• This is a strategically important sale as it meets Sembcorp Industries’s previously stated objectives of decarbonising its portfolio of assets as well as deconsolidating its debt.
• We view the P/B divestment multiple of 1.0x P/B as largely fair with the price having been arrived at after a competitive process which Sembcorp Industries conducted over the past few months.
• During the analyst briefing, Sembcorp Industries’s management emphasized that the buyer is a long-term partner which it will be able to work with for future decarbonisation projects given its deep pockets.

Impact to Sembcorp Industries’s Financials

• Refer to charts in the report attached below that illustrate the effects of the deconsolidating of SEIL on a pro forma basis at the EBITDA, PATMI and NAV level.
  • At the EBITDA level, the DPN income of S$95m implies an effective interest rate of 9.2% for 2022 while at the NAV level, Sembcorp Industries will witness a 1% decline.
  • The positive impact on Sembcorp Industries’s balance sheet includes an increase in its 1H22 EBITDA/interest from 5.1x to 6.3x on a pro forma basis while its debt/capitalisation will decline from 0.66x to 0.62 for 1H22 on a pro forma basis.

Details of the Deferred Payment Note (DPN)

• On the analyst call, management stated that the $2.1b note will sit on Sembcorp Industries’s balance sheet as a long term asset with the cashflow from the DPN not being classified as interest income but instead captured within EBITDA instead. The DPN has a tenor of 15 years and in the case of any shortfall, there is the potential to extend the tenor to a maximum of 24 years which is the end-of-life for the power plants.
• Sembcorp Industries will also have security via a pledge of shares of the purchasing entity. Importantly, the cashflow will be deployed towards building out the company’s renewables assets.

Why the Deferred Payment Note (DPN) structure?

• Sembcorp Industries stated that this vendor-financing structure was necessary in order to bridge the gap between its desire to sell and notable lack of financing in the market for buyers of coal-related infrastructure assets.
• Sembcorp Industries also highlighted that its recent success in obtaining Power Purchase Agreements covering 85% coverage of its Indian power plants allowed this sale to a smoother passage towards completion.

Sembcorp Industries - Earnings Forecast Revision and Recommendation

• No change to our earnings forecast for Sembcorp Industries. Maintain BUY recommendation on Sembcorp Industries with target price based on a target P/E multiple of 13.6x, 1 standard deviation above Sembcorp Industries’s past 5-year average P/E of 10.1x (excluding 2020 where the company reported impairment-related losses) and applied to our 2023 EPS estimate.
• We continue to foresee an upward re-rating of Sembcorp Industries’s valuation multiples due to the scarcity value of solid ESG companies in Singapore, and as the company continues to build out its green energy portfolio.

• Sembcorp Industries remains our top pick in Singapore for the quality of its earnings as well as its growth prospects in the near to medium term.
• Catalysts to Sembcorp's share price include:
  • Sustained economic recovery post COVID-19, thus leading to increased energy and utilities usage.
  • Positive EPS revision momentum as the street upgrades earnings in 2H22.
  • Continued high electricity prices in Singapore, UK and India.
  • Earnings accretive acquisitions in the renewables energy space.

Source: UOB Kay Hian Research - 6 Sep 2022