Sembcorp Industries - From Brown to Green – a Long-Term Strategic Transformation

Date: 28/05/2021

Source  :  UOB KayHian
Stock  :  Sembcorp Ind       Price Target  :  2.59      |      Price Call  :  BUY
        Last Price  :  2.11      |      Upside/Downside  :  +0.48 (22.75%)

  • Sembcorp Industries’s Investor Day profiled a long-expected move towards a greener future, focusing its business growth on renewable energy and sustainable urban development as well as a pledge to deliver net zero carbon emissions by 2050.
  • While the results will take time, we view Sembcorp Industries’s move positively and it could lead to the market applying an “ESG premium” to the stock.
  • Maintain BUY call on Sembcorp Industries with a higher target price of S$2.59.

Sembcorp Industries Investor Day

Long-term transformation.

  • Sembcorp Industries (SGX:U96) held an Investor Day yesterday to profile its transformation from a developer of brown energy to green energy over the next four years to 2025. This includes plans to:
    1. increase its renewable capacity by 4x to 10GW,
    2. increase land sales of its sustainable urban developments by 3x,
    3. lower its carbon emissions by 26%, and
    4. increase the share of its net profit from sustainable solutions to 70% from 2020’s level of 40%.

Fundamentally changing the nature of SCI.

  • Sembcorp Industries stated that it will not invest in new coal-fired energy assets from now on. This is significant in our view, given that the company’s growth in the past decade has come from acquiring and/or developing thermal power projects both in Singapore and overseas which has resulted in a four-fold increase in its emissions intensity over the 2010-20 period. As a result, Sembcorp Industries is targeting to halve its greenhouse gas (GHG) emissions by 2030, and aims to deliver net zero emissions by 2050.

Capex plans over 2021-25:

  • Sembcorp Industries stated that over the 2021-25 period, its projected capex of S$5.5b will be spent 80/20 on renewables and urban development respectively. While the number looks high, 50% of this capex will be project debt whilst the other half will come from capital recycling, operating cash flow and/or divestments.
  • Sembcorp Industries acknowledged that this was a large number, but it believes that at 40% of its total asset base, and with adequate access to “green financing”, this capex will not stretch Sembcorp Industries.

Sembcorp Industries’s key 2025 targets

  • Three of Sembcorp Industries’s key 2025 targets (vs 2020) are to:
    1. raise its ROE from 5.9% to 10.0%,
    2. reduce its debt/EBITDA from 6.5x to 5.4x, and
    3. increase its EBITDA/interest from 2.8x to 4.0x.
  • During the analyst call, management highlighted that while the 10% ROE target appeared to be low, Sembcorp Industries would have a number of “young” renewables businesses by 2025 and thus would be able to generate an ROE in excess of 10% post-2025.

Stock Impact

GHG emission target may lead to thermal-energy divestments at some stage.

  • Longer term, Sembcorp Industries’s net zero emissions target by 2050 implies that the company has to:
    1. significantly grow its renewables capacity to lower its carbon intensity,
    2. improve power generation efficiency and fuel mix, and
    3. divest its thermal coal business, or a combination of all three.
  • While Sembcorp Industries has stated that it is keeping its options open, we believe that longer term, the company has to divest its coal business (or about 42% of its total 9,400MW of thermal power).

Growth is not dependent on M&A.

  • We were pleasantly surprised to hear Sembcorp Industries state that it does not need M&A to grow its renewables business to its targeted 10GW in installed capacity. Given the size of its total addressable market across Southeast Asia, China, India and Vietnam, Sembcorp Industries’s management believes that there are enough organic bids and partnerships for it to achieve its 2025 target.

New sources of debt should assist SCI in addressing its funding needs.

  • Sembcorp Industries stated that green financing, sustainability-linked financing and project financing will be the key sources of funding for its capex.
  • Already in 2021, Sembcorp Industries has established its green financing framework to raise green bonds and sustainability financing, with an eye towards 2023 which is when the company will hit the peak of its debt maturity. Apart from such funding sources, Sembcorp Industries said that it will maintain at least S$1.5b in a revolving credit facility in the long term, as well as recycle capital from its mature assets (when their cash flows peak) into growth projects.

Rising polysilicon costs not a concern for now.

  • Although solar module prices have risen 18% year-to-date due to a supply squeeze in a key component, polysilicon, Sembcorp Industries does not believe that these costs will derail its renewables target. During the analyst briefing, the company gave a detailed outline of how it has invested heavily in building internal capabilities to watch such costs.
  • Sembcorp Industries believes that the current polysilicon shortage is structural and with a supply response on the way. Its 400MW utility-scale solar project in Rajasthan (won on 8 Jan 21) has enough time to be executed. Sembcorp Industries will need to purchase solar modules only in 2H22 and it believes that polysilicon prices will “cool down” by then.

Indian IPO is off the table.

  • During the analyst call, Sembcorp Industries stated that while the previous management had looked to IPO its Indian business (comprising renewable and thermal assets), that small window of opportunity appears to have shut. As a result, Sembcorp Industries is now looking at other ways to recycle its capital for its Indian assets.

Earnings Revision / Risk

  • The targets revealed for the renewables and urban development segments have given us slightly greater confidence regarding Sembcorp Industries’s medium-to long-term growth potential. As a result, we have upgraded our earnings forecast for Sembcorp Industries in 2021-23 by 7-16% on the back of higher revenue growth and slightly better profit margins for both businesses.

Valuation / Recommendation

  • Maintain BUY call on Sembcorp Industries with a higher target price of S$2.59 as we have rolled forward our valuation year to 2022 as well as increased our target P/B multiple to 1.2x.
  • While the Investor Day presented the company with some stretch targets to be met by 2025, which will take time for the new management to execute, we foresee an upward re-rating of Sembcorp Industries’s valuation multiples due to the scarcity value of solid ESG companies in Singapore.

Share Price Catalyst

  • Sustained economic recovery post-COVID-19 thus leading to increased energy and utilities age.

Source: UOB Kay Hian Research - 28 May 2021

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