PhillipCapital Research analyst Terence Chua has upgraded his call for Sembcorp Industries (Sembcorp) to “buy” from “accumulate” with an unchanged target price (TP) of $3.68 following the company’s acquisition of another 1.38 gigawatts (GW) of renewable assets.
In his report dated Nov 15, Chua notes that Sembcorp’s acquisition of 795 megawatts (MW) of solar assets in China and 583MW of renewable assets in India will be accretive to earnings.
The analyst’s upgraded call to “buy” is due to the recent pullback in the share price, while his unchanged TP is still based on a price-to-book value ratio (P/BV) of 1.2x.
On Nov 11, Sembcorp announced that its 49%-owned JV Beijing Energy Sembcorp (Hainan) International entered into share purchase agreements with BEI Energy Development (Beijing) to acquire three solar projects. The projects were acquired for an initial equity consideration of an estimated RMB15 million ($3 million), with future capital injection of up to RMB1.15 billion. Sembcorp will also fully acquire Vector Green Energy in India for a base equity consideration of an estimated INR27.8 billion ($474 million).
Chua says that although the valuation was not disclosed, Sembcorp management guided that acquisitions were conducted at a low double-digit price-to-earnings ratio (P/E). “Sembcorp will fund the acquisition through internal cash resources and external borrowings. Completion is expected in 1QFY2023 and both acquisitions are expected to be accretive to earnings, financials however, were not provided,” he explains.
The way he sees it, Sembcorp’s Chinese and Indian assets are supported by mid to long-term power purchase agreements (PPAs), with the assets in China having PPAs ranging from three to five years.
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“As the power market in China is regulated, this provides greater stability to tariff rates. Management is confident of renewing the PPAs when they become due as the solar assets are located in the south of Hebei Province, one of China’s main energy demand centres. The assets are contracted to the State Grid Corporation of China, a Chinese state-owned electric utility and grid operator,” says Chua.
Meanwhile, he points out that the Indian assets, which comprise mainly solar assets, are covered by long-term PPAs averaging 19 years. “With recent changes to the regulation on the payment of receivables in India, credit quality has improved and the receivables issue has been mostly resolved,” adds Chua.
According to the analyst, the two acquisitions will bring Sembcorp’s gross renewable energy capacity to 8.5GW, closer to its 2025 target of 10GW of gross installed renewable capacity. Its acquisition of Vector Green will also bring significant utility-scale solar capacity to its India business, says Chua.
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With shareholders approving the sale of Sembcorp Energy India Limited (SEIL) to Tanweer
Infra fund, Chua believes Sembcorp will further deploy proceeds to grow its renewables portfolio to beyond its 10GW target.
For FY2022 ending December, he expects continued high electricity prices in Singapore and India to lift over earnings, as well as for Sembcorp to pay out 16 cents of dividends, split between final and special dividends, for the financial year which would translate to a 5.3% dividend yield.
As at 1.54pm, shares in Sembcorp were trading 17 cents or 5.86% up at $3.07 with a dividend yield of 2.29%.
