Cut TP to SGD4.00; lifts ESG with sale of SEIL stake

SCI has eased ESG concerns by the sale of Sembcorp Energy India Limited (SEIL) to Tanweer Infra fund1 for SGD2.1b via a 15-year DPN. We think that this sale is positive on a pro-forma basis given it is strategically imperative for SCI to progress towards being a greener company, while keeping earnings stable and its balance sheet strong. Our FY22/23 earnings cut by 12%/37% and SOTP TP reduced to SGD4.00 from SGD4.50.

Deferred payment note (DPN) to promote acquisition

The divestment value of SGD2.1b implies annualised 2022F PE of 10.2x and P/NTA of 1.03x, which we view as fair given the current market environment for coal-related assets. The price will be settled through a deferred payment note (DPN) over an initial 15 years, with an extension of up to 24 years. The DPN will bear interest at a rate pa equal to 1.8% plus the Indian government 10-year bond yield spot rate (currently 7.2%), minus a greenhouse gas (“GHG”) emissions intensity reduction incentive rate. This means for every 1% of reduction in GHG intensity by the buyer, the interest rate is cut by 9bp subject to a maximum reduction of 20%.

Shareholder value preserved

SEIL generated net profit of ~SGD102m in 1H22. With the DPN structure, earnings from its coal plants would be converted into a form of vendor financing, in our view. Assuming an average interest rate of 8% pa, SCI would receive approx. SGD150m of cashflow per year from DPN, pretty comparable to profits of SGD40m per year from 2019- 2021 from the two coal power plants. In a nutshell, the divestment of the coal power plants would not result in any major disruption to SCI’s profits. The deconsolidation of SEIL would improve SCI’s pro-forma net gearing for 1HFY22 to 1.37x from 1.75x while improving cashflow.

Full steam into renewables; maintain BUY

Management has pledged that the proceeds will be deployed to grow its renewables portfolio to 10GW target (FY21: 7.1GW) by FY25. Excluding contributions from SEIL, we cut our SOTP-based TP to SGD4.00 (from SGD4.50), leaving 17% potential upside. Key catalyst: EPS revision as the street revise earnings for 2H22, continued high electricity prices in Singapore/India and potential earnings accretive acquisitions in the renewables energy space.

Source: Maybank KimEng Research - 8 Sept 2022