Stacking up against renewable peers
? Our competitive analysis of SCI’s gearing shows that its balance sheet position is in line with peers with similar renewable portfolio and aspirations.
? On average, SCI’s net debt/EBITDA of 5.5x in FY21F is close to Thai (6.1x) and China (5.9x) companies but higher than US/European listed peers (4x).
? We believe the discount gap between SCI and peers may narrow if SCI starts to deliver a consistent earnings track record and improve its interest cover.
? Based on SCI’s new segment reporting, we adjust our valuation methodology from P/E to SOP, raising our TP to S$2.96. Reiterate Add.
SCI’s net gearing is acceptable in the industry
We attempt to address some investor concerns about SCI’s high net gearing position by performing a competitive analysis comparing SCI’s efforts in expanding into renewable assets vs. peers with similar geographical and portfolio mix (combination of conventional energy and renewable energy as well as those that SCI aspires to become). The headline net gearing of the sector is generally high at 1.3-1.4x (based on last reported year and consensus forecast). On average, SCI’s net debt/EBITDA of 5.5x in FY21F is close to Thai (6.1x) and China (5.9x) companies, but higher than peers listed in the US and Europe (4x) that have more mature track records and higher portions of renewable energy portfolio.
Profitability of renewable segment to grow 26% yoy in FY23F
We think consistent delivery of earnings (with no significant impairment) could put SCI’s earnings profile ahead of peers as w e forecast its 3-year EPS CAGR of 47% (regional peers: 17%). The earnings profile will better reflect its renew able efforts in FY23F as this segment should achieve 26% yoy net profit growth, mainly from the full-year contribution of recent renew able acquisitions – CGN Capital Partners and SDIC New Energy in China.
Reaching c.66% of 10GW renewable target
SCI is on track to meet its renewable assets target of gross capacity of 10GW by FY25F. In FY21, SCI added c.2.9GW of wind assets and c.0.9GW of solar assets into its portfolio, bringing total gross renew able capacity to c.6.6GW upon completion. On a net basis, we estimate SCI w ill have 4,972MW attributable renewable energy (or c.53% of its portfolio) by FY23F. Moving forward, we think China still presents the greatest opportunity for growth for SCI due to its sizeable market and favourable government policies encouraging investments in renewable projects.
Retain Add; TP raised to S$2.96 on SOP valuations
We up our FY22-23F EPS by 36-54% for renew able energy acquisitions in China as well as long-term power contract secured in India and coal contract in India. FY21F EPS is cut by c.23% on higher corporate costs and low er urban development profits in 2H21. Our TP implies c.11x FY23F P/E, still below blended trading band of Asian renewable and conventional energy peers of 14x. Re-rating catalysts: decarbonisation of conventional energy assets and consistent earnings. We expect SCI to achieve a S$252m net profit in 2H21F (results expected on 23 Feb 2022). Downside risks: significant impairments ,
unfavourable regulatory changes.