CGS-CIMB Research analysts Lim Siew Khee and Izabella Tan have maintained their “add” rating on Sembcorp Industries (Sembcorp) U96 as they see multiple re-rating catalysts that are now visible.
On this, the analysts have also increased their target price to $6.20 from $5.21 previously. The new target price is based on Sembcorp’s FY2024 P/E of 14x, which is in line with its regional peers and up from 12x previously.
In their report, the catalysts identified include the potential divestment of SembWaste and its waste energy from waste (EfW) plant, which could result in a gain of some $215 million to $250 million for Sembcorp.
On June 6, Sembcorp announced that it is exploring the potential divestment of SembWaste, its waste management business, which posted an FY2022 net profit of $13.86 million with estimated ebitda of $34 million.
The announcement also mentioned the potential sale of its EfW plant, which the analysts believe could be Sembcorp’s Sakra facility which was built in early 2016 at a cost of $250 million. Assuming a 25-year useful life, they are estimating the book value of the EfW plant to stand at around $190 million as at end FY2022.
Sembcorp has appointed HSBC as its financial advisor for the potential transaction, for which preliminary discussions with selected parties have already commenced. According to a Reuters report on May 9, KKR & Co, Macquarie Asset Management and I Squared Capital were among potential bidders for SembWaste.
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Lim and Tan believe the SembWaste deal could be valued at US$500 million ($675.7 million), 19.8x its FY2022 enterprise value-to-ebitda ratio (ev/ebitda) or 48x its FY2022 price-to-earnings ratio (P/E).
They have used a valuation range of 9-10x EV/EBITDA for SembWaste, pegging it to the acquisition of its peer 800 Super Holdings Ltd by the Keppel consortium in August 2022, as well as a 1x price-to-book value (P/Bv) valuation of EfW.
By their estimates, this means total proceeds from the divestments could range from $496 million to $530 million with potential gains of $215 million to $250 million.
If Sembcorp decides to pay dividends from the gains, they are assuming a 40% payout ratio, yielding 5 cents to 6 cents per share in FY2024 if the transactions are completed in 2024.
Meanwhile, other catalysts for Sembcorp are the “surprisingly strong” spot energy prices in Singapore. The Uniform Singapore Energy Price (USEP) average year-to-date (ytd) in May 2023 was 30% higher compared to 2H2022 and 4% higher compared to 1H2022, mainly due to stronger demand, and a lower supply cushion of around 12.4% as at end-April.
“We believe the degradation of Singapore power plants, which are 16 years old on average, also resulted in some ad hoc maintenance and a more volatile USEP trend,” explain the analysts.
“Sembcorp’s ability to optimise its gas feedstock, as it is also a licensed gas importer, allows it to maximise margins compared to other power generating companies,” they add.
The analysts are also expecting to see a positive share price momentum when Sembcorp announces its new renewable energy target after surpassing its previous 10GW-by-2025 target with some 11GW in gross capacity as at end-March.
To fund its new renewable energy growth, the analysts believe Sembcorp could kickstart a capital recycling exercise through asset monetisation, or the “paring down” of its majority stake in some of its more mature renewable energy assets in India and China, disposing of its stake to infrastructure funds or private trusts.
“We believe renewable projects that are more than five years in operation could be candidates for monetisation. This could reduce the need for a cash call in the medium term, in our view,” say Lim and Tan.
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Finally, given its market cap of some $10 billion and a free-float of around 50%, they see the potential for Sembcorp to be included in the MSCI Singapore Index either in the upcoming review in September later this year or in February 2024. “As we see Sembcorp as a clear environmental, social and governance (ESG) proxy, we believe its inclusion into the index could draw more global investors’ interest,” they add.
“We believe Sembcorp’s share price could rerate to be in line with its global renewable energy peers as Sembcorp expands its renewable energy capacity beyond 10GW while maintaining a stable load of profits from conventional energy,” they say.
Their downside risks include prolonged unplanned shutdowns, unfavourable regulatory changes impacting its operations and therefore earnings, a sudden spike in unhedged feedstock costs, impacting margins, and a delayed start-up of projects under development.
As at 12.44pm, shares in Sembcorp were trading 4 cents or 0.75% down at $5.33.
