Accelerating net zero target; ESG uplift
- We raise our TP to S$4.78, now based on 12x CY23F P/E (10% discount to regional peers). Re-rating catalysts: stronger-than-expected RE/CE profits.
- SCI is divesting its Indian coal power plants for S$2.1bn to Oman pension fund-backed Tanweer. This cuts its GHG emission by 60% to 10.4m tCO2e.
- The consideration will be paid via deferred note over 15 years at 1.8% plus 10-year Indian bond yield or an estimated c.S$150m p.a. of cash inflow. Add.
Farewell India coal plants
SCI is alleviating the ESG concerns over its coal assets by selling its entire 100% stake in Sembcorp Energy India Ltd (SEIL) to Tanweer Infrastructure Pte Ltd (Tanweer) at 1.0x SEIL’s P/BV (as at 30 Jun). The total consideration of Rs117,338m (c.S$2,059m) will be settled through a deferred payment note (DPN) over an initial period of 15 years, with an extension of up to 24 years. The DPN comes with an annual interest rate of 1.8% (base rate) plus the Indian government 10-year bond yield spot rate (currently at 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 would be reduced by 9bp subject to a minimum reduction of 5%. SEIL’s current GHG intensity is at 0.84 tCO2MW/h vs. 0.82tCO2MW/h at Tata Power’s Mundra Ultra Mega Power, the best for GHG intensity.
Secured annual cashflow of c.S$150m for 15 years
SEIL generated net profit of c.S$52m in FY21 and c.S$102m in 1H22. The absence of coal profits would be converted into a form of vendor financing, in our view. SEIL runs two coal power plants with a gross installed capacity of 1,320MW each. Apart from a contract with Telangana DISCOMS for 570MW expiring in 2024, contracts for the remaining 1,575MW extend to 2033-2040. Assuming an average interest rates of 8% p.a., we estimate SCI to receive c.S$150m of cashflow p.a. from DPN, relative to profits of c.S$40m p.a. from 2019- 2021 from the two coal power plants due to the lack of long-term power purchase agreements (PPAs) for its second plant, SEIL 2. In a nutshell, the divestment of the coal power plants would not result in a major dent in SCI’s profits. The deconsolidation of SEIL would reduce SCI’s proforma net gearing to 1.37x from 1.75x as of end-1H22.
Up in ESG benchmarking and TP raised to S$4.78; reiterate Add
We keep our EPS forecasts for now. We have factored in declines in net profit of 38% hoh in 2H22F to S$310m, and 15% yoy in FY23F, pricing in potential reduction in energy prices if demand/supply disruption dissipates. SCI has outperformed the FSSTI by c.70% YTD but we think there is further upside to be reaped given its decarbonisation plans. With the removal of SEIL, we now value SCI based on 12x CY23F P/E (previously: SOP of renewable and conventional energy EBITDA). Our TP is based on 10% discount to regional utilities peers’ 14x FY23F P/E. Note that renewable peers are trading at 28x. In our ESG benchmarking, we had said that successful decarbonisation efforts could lead to premium valuations ascribed to SCI as it is the only pure renewable energy proxy in Singapore. Downside risks: prolonged unplanned shutdown, unfavourable regulator changes.