The Green Pivot
Initiate with BUY; leader in sustainable solutions
We initiate coverage on SCI with BUY and a SOTP-based TP of SGD3.40, implying 14% upside. We like SCI due to: a) substantial additional earnings potential from its plan to boost renewable energy (RE) capacity to 10GW by FY25E; b) continued high tariffs contributing to good spark spreads in Singapore and India; c) resilience to rapid inflation and high interest rates; d) uniqueness amid scarcity of solid ESG companies in Singapore; e) attractive valuation as SCI consistently generates higher ROE than peers and is trading at a discount to Asian utilities peers.
Fulfilling insatiable demand for Renewable Energy
According to IEA, global energy demand is poised to surge 47% by 2050 as electrification increases and living standards improve. RE would be the fastest growing energy source, increasing from 2% in 2020 to 18% of total energy in 2030E. RE is SCI’s fastest-growing segment in our forecasts, potentially boosting earnings by 22-25% YoY pa until FY24E. A key metric to monitor is renewable ROE growth, which we project to rise to c10% (FY21:4.6%) and head northwards to c20% as assets mature, cashflow contribution rises and project debt repaid.
Elevated electricity prices drive earnings higher
Due to persistently high tariffs in India (+58% YoY) and Singapore (+242% YoY), we expect spark spread for SCI’s conventional energy to surge by 3ppt YoY and a full-year contribution of exceptional profits (+6% YoY) from Cogen in FY22-FY23E. Of note, 85% of SEIL plant 1 and plant 2 are underpinned by long-term and mid-term PPAs, putting SCI’s India business in a stronger position financially in FY22E. The Indian tariff hikes coupled with stable PLF of above 70% since Feb‘22 for plant 2 may continue to boost PATMI (+23% YoY) in FY22E.
Attractive investment in Singapore renewables
We project SCI’s FY22E earnings to beat consensus and view any pullback in the share price as an opportunity to buy. At 10.3x FY22E P/E, SCI is undervalued compared to regional utilities peers (ave.20.7x) and Singapore industrial peers (c17.8x). SCI has been consistently generating higher ROE (13.1%) than peers. It maintains a high return on sustainable equity ratio compared with top Asian utilities and Singapore industrial peers. Potential re-rating catalysts would be divestment of SCI’s thermal
power plant in India with profits replaced by earnings from RE capacity expansion as SEIL focuses on decarbonisation. Key risks include unplanned shutdowns, unexpected impairments and decline in spot electricity prices in Singapore or India.
