Sustainable Rally on Renewable Drive
- SCI has expanded installed renewable capacity by 130% within a year
- Improving power market in Singapore and India calls for earnings upgrades and sets the stage for divestment of coal-fired assets
- Warrants re-rating closer to its renewable peers
- Maintain BUY; TP lifted to S$3.00
Promising Execution of Green Transformation Strategy – a Critical Factor of share price
Game changing Brown-to-Green Strategy. In May-2021, SCI unveiled its strategy to transform its portfolio from brown to green, by focusing on growing renewables and integrated urban solutions businesses. It set quantitative targets to quadruple its renewable portfolio to 10GW by 2025, from 2.6GW of wind and solar capacity in Southeast Asia, India, and China as of end-2020. This would lift renewables as a percentage of total energy capacity from 20% to 50%. Coupled with the urban business, sustainability solutions are expected to contribute 70% of group earnings by 2025.
Promising renewable growth especially in China. SCI has demonstrated strong commitment in executing the green transformation plan. Including recent acquisitions that will be concluded in 1H2022, SCI’s gross installed renewable capacity has impressively grown by 134% to 6.1GW (4.3GW attributable to SCI). In particular, recent acquisitions in China involve sizeable, quality platform assets that will strengthen SCI’s operational and technical capabilities in China, deepening SCI’s foothold in the fast-growing renewable market.
Vietnam is up and coming too… Besides China and India, Vietnam is another up-and-coming new market added to SCI’s portfolio in 2020. Vietnam is likely to be another growth engine for SCI with 3GW of rooftop solar opportunities at SCI’s industrial parks there, leveraging on SCI’s strong working relationship with the tenants. In addition, SCI has signed a collaboration agreement with BCG Energy to jointly develop a pipeline of up to 1.5GW of wind and solar projects in Vietnam. The first phase, 550MW portfolio of utility-scale nearshore and onshore wind assets, is expected to come online by end of 2022.
UK – expanding battery capacity. SCI is also expanding its energy storage business. In Dec-2021, it announced plans to build Europe’s largest batter, a 360MW energy storage system at Wilton International on Teesside. This follows its plan to build a first-of-a-kind 300MW net zero emission plant in Jul-2021. The portfolio size is expected to be over 1.6GW in the UK with half being supplied by batteries. While SCI faced operational headwinds in the UK previously, the company has learnt to overcome challenges and hopefully able to turn around the UK operations in the near future.
A testament to new management’s execution. Current Group President & CEO, Mr. Wong Kim Yin came on board on 1 July 2020 while Group CFO, Mr. Eugene Cheng joined SCI on 8 Mar 2021. The solid progress of the transformation strategy, operational improvement in the past 1.5 years and their active engagement with investors are testaments to management’s execution and credibility.
Improving Power Market in Singapore and India
Singapore spot electricity prices skyrocketed in 4Q21. Average monthly uniform Singapore energy price released by Energy Market Authority (EMA) almost tripled q-o-q in 4Q21 to S$437/MWh. This is attributable to higher than usual electricity demand, outage of several generation units, curtailments of gas from West Natuna, and low landing pressure of the gas supplied from South Sumatra.
Exceptionally high gas price. Against the backdrop of energy crunch, benchmark JKM LNG prices shot up from ~US$10/mmbtu in Jun-2021 to an unprecedented level of US$50/mmbtu in Dec-2021before moderating to the US$25/mmbtu level currently.
Electricity prices to stay elevated, lifting spark spread. While some moderation from the unusually high levels seems inevitable, electricity prices will likely stay relatively high in view of the higher input cost and improved supply/demand fundamentals. This is expected to turn around the power plants in Singapore that have been suffering losses in recent years.
Reviewing earnings post results in end Feb. It is rather challenging to project earnings recovery of SCI’s Singapore power business given the lack of details such as input source and cost, % of purchased electricity, electricity user split between industrial and households etc. Based on historical performance, Singapore’s energy business contributed S$50-80m to bottomline during 2014-2017. We await more clarity and datapoints in the upcoming FY21 results due 23 Feb to review Singapore power earnings.
Improving power market in India sets the stage for listing or divestment of coal-fired power assets. Tariff has risen from an average of ~INR 2,600/MWh in 2020 to almost INR 4,000/MWh in 2021 and remains at a high level in Feb-2022. The more favourable power supply/demand dynamic in India has aided the finalization of long-term PPAs for its second coal-fired power plant. Including two recently concluded long-term PPAs, c.81% of the second plant is now contracted. With 80-90% of both plants with 2,640MW total capacity contracted on a long-term basis, earnings visibility has improved. Furthermore, we believe this sets the stage for potential listing or divestment of the coal-fired power plants, accelerating SCI’s decarbonization strategy.
More room for re-rating
Renewable growth yet to be priced in. While SCI’s current valuation at 1.1x PB and ~12x PE might seem fair against 10% ROE and 3% yield, we believe there is room for further re-rating, as the stock warrants a valuation premium for its higher renewable contribution and good ESG.
Renewable players trade at a premium. Renewable companies in China and India are trading at average P/Bv of 2.1x and PE of c.20x while the US/European players command an even higher valuation of 2.6x P/Bv and 24x PE.
Comparable financials. Global renewable peers are delivering similar high-single to low-teens ROE and ~10% earnings growth. While SCI’s gearing is on the high side on an absolute basis, at c.2x net gearing and c.5.7x net debt / EBITDA, it is in line with industry peers given the capital intensive, asset heavy nature of power generation business. We find comfort that the renewable power assets are typically backed by PPAs, generating more predictable cash flows and returns over the asset’s life.
Raising the bar. We are raising our P/Bv valuation multiple to 1.4x (from 1.2x previously) in view of promising renewable growth outlook and contribution, and have rolled over valuation to FY22 (from blended FY21/22). Accordingly, our TP is lifted to S$3.00, translating to ~14.5x FY22 PE. This still represents a 25-33% discount to Asian renewable peers. We believe the discount will continue to narrow over time as SCI delivers on its renewable transformation and earnings growth.