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Analysts maintain 'buy' for Sembcorp after further renewable acquisitions in China

Bryan Wu
Bryan Wu11/24/2022 12:39 PM GMT+08  • 4 min read
Analysts maintain 'buy' for Sembcorp after further renewable acquisitions in China
Sembcorp has acquired 830MW of Chinese solar and wind assets, including 62MW under development, in Hunan and Guizhou by 1HFY2023 for around $204 million.
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Analysts from CGS-CIMB Research and PhillipCapital have maintained their “add” and “buy” ratings for Sembcorp Industries with unchanged target prices (TPs) of $4.78 and $3.68 respectively.

On Nov 17, Sembcorp announced that it was acquiring 830 megawatts (MW) of Chinese solar and wind assets, including 62MW under development, in Hunan and Guizhou by 1HFY2023 for around $204 million. This comes off the back of Sembcorp’s acquisition of a 45.3% interest in Xingling New Energy from Wuling Power, an affiliated company of State Power Investment Corporation Limited (SPIC).

Out of the 62MW under development, 50MW has been completed and commercial operational dates (CODs) are expected by 1QFY2023 and range from 2015 to 2022 with an average asset age of five years, note the analysts from CGS-CIMB, Lim Siew Khee and Izabella Tan. The assets are contracted to the grid for one year or three to five years, pegged to coal on adjustable grid tariffs, with around 60% of contracts eligible for government subsidies.

Upon completion, Sembcorps’s total gross renewable capacity will increase to around 9.4 gigawatts (GW), accounting for 3.4GW in solar, 5.6GW in wind and 0.3GW in energy storage, including work in progress (WIP) assets — closer to its 10GW target by 2025. Lim and Tan’s TP of $4.78 is based on a 12x 2023 price-to-earnings ratio (P/E).

Meanwhile, Terence Chua of PhillipCapital, whose TP of $3.68 is based on a 1.2x price-to-book value ratio, says that the acquisition of Xingling will be accretive to Semborp’s earnings. “The valuation was not disclosed, but management guided that similar to its acquisition of BEI Energy and other acquisitions, this was done at low double-digit P/E. SCI will fund the acquisition through internal cash resources and external borrowings. Completion is expected in 1H23 and the acquisition is expected to be accretive to earnings,” he says, noting that financials were not provided.

Chua points out that the acquisition diversifies Sembcorp’s presence from north western China and will solidify the company’s presence in Hunan in central China. According to Sembcorp, the analyst says that Hunan currently imports 90% of its coal with reserve margins of less than 20%, making power generation in Hunan a valuable prospect. With the assets also relatively new at 4.9 years, he estimates that the internal rate of return (IRR) of the project is an estimated 11% to 12%.

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“Importantly, the acquisition of a 54.7% stake in Xingling New Energy also allow the Group to broaden its partnership with SPIC in renewables and green energy,” he adds.

CGS-CIMB’s Lim and Tan note that Sembcorp reiterated briefing that the company will not pursue equity fundraising, with the transaction set to be funded internally and through external borrowings. As at 1HFY2022, Sembcorp had a net debt/equity of 1.66x and a net gearing of between 1.0x to

1.3x, which they believe could be slightly raised after its recent acquisitions, which also includes the BEI and Vector Green acquisitions. They say they are still “comfortable” with the slightly raised net gearing, considering that its renewable peers currently average around a2.3x net debt/equity.

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“We also think Sembcorp is in a stronger position now compared to in May 2021 to service its debt since the recently-purchased 2.3GW of renewable assets are immediately cash flow generative upon acquisition and power sales remain strong,” say the analysts.

“Management also said that it is exploring capital management strategies that could include selling minority stakes of its current assets, listing yield vehicles, and/or raising private funds for Limited Partners (LPs) to directly invest into projects with Sembcorp,” they add.

Lim and Tan estimate that all three acquisitions will add around $60 million to $70 million to the company’s FY2024 net profit, or around 10% to its FY24 earnings per share (EPS). Their re-rating catalysts include stronger-than-expected renewable and conventional energy profits, while key downside risks include prolonged unplanned shutdowns and unfavourable regulatory changes impacting operations and profits.

PhillipCapital’s Chua expects continued high electricity prices in Singapore and India to lift earnings for FY2022 and for Sembcorp to pay out dividends of 16 cents of dividends for the year, split between final and special dividends, translating to an estimated 5.3% dividend yield.

As at 12.05pm, shares in Sembcorp were trading 1 cent or 0.31% up at $3.21.

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