<News Analysis> Long-awaited divestment of India power plants
- Divesting 100% stake in SEIL that holds its two coal fired power plants in India to Tanweer for a consideration of S$2.1bn or c.1.0x P/Bv
- Consideration will be settled via a deferred payment note by SCI, which will offer steady interest income for next 15-years.
- The sale accelerates the transformation of SCI’s portfolio from brown to green; lifting share of renewable portfolio to 51%
- A promising transition that decarbonise, deleverage and preserved shareholder value. Reiterate BUY; current TP S$3.80
Sembcorp Industries Ltd (“SCI”), is selling 100% of its shares in Sembcorp Energy India Limited (“SEIL”) that owns two coal-fired plant totaled 2,640 MW in India, to Tanweer Infrastructure Pte. Ltd. (the “Tanweer”). Tanweer is a consortium led by Oman Investment Corporation S.A.O.C. (“OIC”), the Ministry of Defence Pension Fund, Oman (“MODPF”) and Dar Investment SPC.
Decent valuation at 1x PB. The consideration for the SEIL Sale is INR117,338m (approx.. S$2,059m), subject to certain adjustments. The base purchase price is 1.0x of the SEIL book value as of 30 June 2022. SCI is expected to register a small disposal gain of S$11m upon completion.
Deferred Payment Note provides steady income stream. On Completion, Tanweer will settle the entire consideration via a facility provided by SCI under a Deferred Payment Note (DPN). The DPN will bear interest at a rate equal to Indian government 10-year bond yield spot rate plus 1.8%, minus a greenhouse gas (“GHG”) emissions intensity reduction incentive rate (“GHG Reduction Incentive Rate”), for 15-years. DPN income (post tax) is expected to be ~S$158m for 2022 on proforma basis, mitigated the loss of income from the two power plants, which were projected to be S$140-180m pa on normalised basis.
Accelerates Brown to Green transformation. Post divestment, % of power capacity share from renewable will be lifted from 43% to 51% as of end Jun 2022 on proforma basis. % share of profit from sustainable solutions for 1H22 would also be raised from 25% to 31%. GHG Emissions Intensity (tCO2e/MWh) is expected to be reduced from 0.51 to 0.32, ahead of its target of 0.4 by 2025. The debt headroom that has been freed up and payment that received from DPN will be redeployed into renewable investment.
Timeline. Circular should be dispatched in Oct-2022 before EGM in Nov-2022. Target completion within 6-months from EGM. Besides shareholders’ approval and relevant authority/regulatory clearance, SCI will be required to obtain written consent from lenders and relevant counterparties ie the power distribution company. Management is confident to obtain relevant approvals and clearance. Lender and Counterparties should find comfort with the reputable profile of Tanweer, SCI’s continuous support on technical expertise post transaction and the DPN arrangement.
The positive development will likely move SCI’s share price closer to our TP of S$3.80. Reiterate BUY
