SINGAPORE (Sept 6): UOB Kay Hian is maintaining its “buy” call on Sembcorp Industries (SCI) with a higher target price of $3.59.
This follows the group’s announcement on Thursday it will be acquiring the remaining 28% stake in Sembcorp Green Infra (SGI) from IDFC Private Equity Fund III (IDFC) for INR14.1 billion ($301 million).
See: Sembcorp acquires remaining stake in India renewable energy provider SGI for $301 mil
Upon completion of the acquisition, which is scheduled to be in 1Q18, SCI will own 100% of SGI.
In a Monday report, analyst Foo Zhi Wei says, "With earnings contribution from its 250MW Tamil Nadu plant to contribute to earnings in 2018-19, earnings on a 100% basis are expected to grow at least 15% y-o-y in 2018."
The deal will be internally funded using proceeds from the group’s MTN issuance.
Foo says, “We understand from management that the price was a mutually agreed value based on the shareholders’ agreement entered into by both parties when SCI acquired its first stake in 2015.”
This was acquired at a 24% discount to peers on an EV/EBITDA basis and a 7% discount to peers on an Enterprise Value per Installed MW (EV/MW) basis, according to past transactions in the last 12 to 15 months.
The deal implies an equity value of about $680 million and a net debt of $950 million.
Renewables in Asia-Pacific are trading at a forward EV/EBITDA multiple of 8.4x on average, according to EY’s Power Transactions and Trends Q217.
“On our estimates, the forward EV/EBITDA multiple at which SCI acquired the remaining SGI stake implies more than 20% discount, making it a good deal,” says Foo.
“Our valuation is based on a SOTP of its utilities and marine businesses, with the one-year forward PE multiple for its utilities business tied to the trading multiples in its respective geographies,” adds Foo.
Hence, this translates to a blended 10.1x 1-year forward PE, a 17% discount to its Asia-Pacific ex-Japan peers.
As at 9.45am, shares in SCI are trading flat at $2.96, with a 2018F price to book of 11 times and a dividend yield of 2.7%.
