Sembcorp Industries - Renewable energy to drive earnings and valuation

17 Apr 2023

SCI’s Singapore power capacity is nearly fully contracted till 2024. This provides visibility of earnings as Singapore accounts for more than 70% of revenue and SCI earns a spread on the sale of energy.
Sale of the Indian power plants will not dent profit as the earnings foregone is compensated with interest income receivable from the buyer. But it will book a non-cash accounting loss of S$81mn in FY23e on reversal of currency translation and capital reserves.
Renewable energy is the key growth driver, with 24% added capacity from end 2022, China re-opening and stronger energy demand in India. We maintain our BUY recommendation and raise TP to S$5.06 from S$3.68, based on 11x PE for FY24e.

Highlights

Singapore power capacity is nearly fully contracted till 2024, with the latest 18-year power purchase agreement signed with a unit of Micron Technology, Inc. for up to 450MW. Though the Uniform Singapore Energy Price (USEP) has eased by 10.5% in Jan-Mar 23 compared with FY22, margins should be maintained as it works on a cost-plus model.
Energy Market Authority is calling for proposals in 2H23 to add electricity generation capacity by 2028. Peak electricity demand is projected to rise at a CAGR of 4-6% to reach between 10.1GW and 11.7GW by 2028, from 7.8GW currently. We believe this lowers reserve margin from current 34% to less than 15%. To ride on the growth in energy demand, SCI has commissioned the construction of its fourth hydrogen-ready 600MW combined cycle power plant, which would be operational by 2026.
Sale of Indian power plants for S$2bn at end Feb 2023 will not dent net profit. SCI extended a 15-year extendable loan to the buyer at an interest rate of about 9%. We estimate interest income of about S$132mn, which would offset net earnings loss of S$144mn from these assets. SCI will, however, book a non-cash accounting loss of S$81mn in FY23e from the reversal of currency translation and capital reserves.
Renewable energy segment will be the growth engine, led by 1) uplift in energy demand with China’s re-opening. China accounts for 53% of its gross installed capacity; 2) India’s growing share of global manufacturing output as manufacturers set up China+ manufacturing base to diversify risks; and 3) SCI has added renewable energy assets, mainly through joint ventures that do not strain its balance sheet. Total gross installed capacity has increased by 24% since end-2022 to reach 10.3 GW. We estimate an ROE of 8-10% on these assets. But ROE from future acquisitions could decline, due to 1) higher interest costs; 2) intense competition for these assets; and 3) softer macro environment that affect tariffs.
Land sales to be ramped up to 500 ha in 2025, underpinned by a strong orderbook of 312 ha and landbank of 2,743 ha, which are mainly in Vietnam. These would bring net gearing down to 0.96x at end-2024.

Maintain BUY and raised TP to S$5.06

We maintain our BUY call and raise TP to S$5.06, based on 11x PE for FY24e.