Busy Adding To Its Renewables Portfolio
Since the announcement of its intention to move from brown to green energy, SCI has
been very active on the business development front with over S$1b worth of deals done
in China alone. Apart from China, the company has also signed up to another six
renewables deals in Asia as well as in the UK, with likely more to come. SCI remains a
key blue-chip holding in any Singapore portfolio in our view. Maintain BUY. Increase
target price to S$3.59 (previously S$2.95).
WHAT’S NEW
• Active on the business development front. In the past six months, Sembcorp Industries
(SCI) has been notably active on the business development front with nearly one deal every
month since Jul 21. Importantly, all of these deals have been focused on expanding SCI’s
renewables footprint as can be seen in the table below. We believe the company will remain
busy with more renewables deals for the remainder of 2022.
• Well on target to build up its green energy portfolio. While a number of the projects
above are still in the planning stage, we highlight that SCI has built up its renewables
portfolio quite aggressively from 2.6GW gross installed capacity at the start of 2021 to
5.3GW at present – this excludes another 1.1GW that is currently under development. Thus,
we believe that the company is on target to achieve its plans of increasing its renewable
capacity to 10GW by 2025. In Oct 21 and Apr 22, SCI raised a total of S$975m in
sustainability-linked notes, all of which were well subscribed and thus underlining the
market’s confidence in the company’s strategy.
STOCK IMPACT
• Conventional power assets – Not great for SCI’s ESG score but solid returns at
present. While the company has plans to reduce the contribution of its conventional power
assets to its bottom line as it moves towards renewables, we expect conventional energy to
have an outsized contribution in 1Q22 and 1H22 due to the current high prevailing electricity
prices in India and Singapore. In India, SCI has long-term Power Purchase Agreements
(PPA) in place and thus is not likely to face regulatory risk of having lower power prices
unilaterally imposed on them.
• India – Becoming less of a headache. With the signing two long-term supply contracts for
825MW from its P2 plant in Jan and Feb 22, 85% of Semborp Energy India Limited’s (SEIL)
2.6GW capacity will be under mid- or long-term contracts. This puts SCI’s India business in
a stronger position financially in 2022, and more importantly has made its India thermal
portfolio more attractive to potential acquirers. Going forward, the company has stated that it
will look to sign more PPAs to ensure 100% coverage for its P2 asset.
• ROE expansion in SCI’s renewables business. A key aspect to look out for in SCI’s
results going forward is the ROE for its renewables business. Its 2021 results show an ROE
of 4.6%. However, this is expected to increase as these assets mature. Currently, with an
average age of 4-5 years for its renewables assets, an ROE of around 5-7% is to be
expected. However as assets mature and earnings and cashflow contribution increases,
coupled with the paying down of project debt, ROE is expected to trend up to 10% and head
northwards to 20% as they get older.
EARNINGS REVISION/RISK
• We upgrade earnings for 2022-24 by 6-11% to take into account: a) better-than-expected
contribution from the Singapore power market, and b) a turnaround to profitability at its
Indian power business in 2022.
VALUATION/RECOMMENDATION
• Maintain BUY with a higher target price of S$3.59 based on a target PE of 13.6x. This
target PE multiple is 1SD above SCI’s past five-year average PE of 11.2x (excluding 2020
where the company reported impairment-related losses). We have elected to change our
target price methodology from the previous P/B multiple basis to using a target PE multiple
as we believe using the latter more fairly and accurately reflects the company’s forward
valuations given that we have moved past the peak of the COVID-19 pandemic.
• Inexpensive vs developed Asia utilities companies. We note that on both PE and P/B
bases, SCI trades at a discount to its utilities peers in developed Asia as shown in the table
below. The valuation gap between SCI and its Emerging Asian peers is slightly larger at as
its comparable companies trade at average 2022F PE and P/B of 16.8x and 1.5x
respectively. We continue to foresee an upward re-rating of SCI’s valuation multiples due to
the scarcity value of solid ESG companies in Singapore. We also highlight that listed
renewables companies trade at 3-4x P/B, which are at a substantial premium to SCI.
SHARE PRICE CATALYST
• Sustained economic recovery post COVID-19, thus leading to increased energy and utilities
usage.