SHARES of Sembcorp Industries : U96 +4.5% jumped to a 4.5-year high on Tuesday (Sep 6), after the group announced on Monday that it would sell its India-based coal power unit for 117 billion rupees (S$2.1 billion).

 

The counter reached a high of S$3.51, up 5.4 per cent or S$0.18 as at 9.45 am. The last time the counter closed near this level was Feb 5, 2018. By the midday trading break, Sembcorp was trading 4.2 per cent or S$0.14 higher at S$3.47, with 14.6 million shares changing hands.  

 

In a bourse filing on Monday evening, Sembcorp said its wholly-owned subsidiary Sembcorp Utilities entered into an agreement with Tanweer Infrastructure to sell Sembcorp Energy India Limited (SEIL). 

 

SEIL, one of the largest independent power producers in India, operates 2 coal-fired plants totalling 2.6 GW. Its S$2.1 billion price tag is at an implied price-to-book multiple of 1 time.

 

The buyer, Tanweer, is indirectly owned by a consortium led by the Oman Investment Corporation in partnership with the Oman Ministry of Defence Pension Fund and Dar Investment.

 

Tanweer will settle the final consideration via a deferred payment note (DPN) provided by Sembcorp Utilities. DBS Group Research expects DPN income to be around S$158 million (post-tax) for 2022, on a pro-forma basis.

 

This will help mitigate the loss from the 2 power plants &ndash projected to be between S$140 million and S$180 million per annum, on a normalised basis.

 

DBS expects the SEIL deal to move Sembcorp&rsquo s share price closer to its target price of S$3.80, implying a potential upside of 9.5 per cent. The research team has reiterated &ldquo buy&rdquo on the counter.

 

Notably, the proposed sale will accelerate Sembcorp Industries&rsquo brown to green transformation, analysts said in reaction to the deal.

 

Selling SEIL will cut the group&rsquo s greenhouse gas emissions by 60 per cent, CGS-CIMB noted in a report on Tuesday.

 

While UOB Kay Hian (UOBKH) views the proposed sale favourably given the strategic imperative towards going green, Lim & Tan Securities is &ldquo neutral&rdquo on the move as the accretion on return on equity and return on assets is &ldquo limited&rdquo for 2022.

 

That being said, Lim & Tan maintained its &ldquo neutral&rdquo call on the stock as a whole, given how Sembcorp has risen sharply this year and trades at 1.4 times its book value with a 2 per cent yield.

 

Meanwhile, CGS-CIMB raised its target price to S$4.78 from S$3.80, implying a potential upside of 37.8 per cent. The new target is based on a 10 per cent discount to regional utilities peers, who are trading at 14 times CGS-CIMB&rsquo s estimated FY2023 earnings, while renewable energy peers are trading at 28 times.

 

With the removal of SEIL, CGS-CIMB now values Sembcorp at 12 times its earnings estimate for the 2023 calendar year.

 

&ldquo In a nutshell, the divestment of the coal power plants would not result in a major dent in Sembcorp&rsquo s profits,&rdquo said CGS-CIMB Lim Siew Khee. She added that the deconsolidation of SEIL would also reduce the group&rsquo s proforma net gearing to 1.37 times from 1.75 times as at end-H1 2022.

 

As for UOBKH, it maintains its &ldquo buy&rdquo call on Sembcorp with an unchanged target of S$4.10, implying a potential upside of 18.2 per cent.

 

&ldquo Sembcorp remains our top pick in Singapore for the quality of its earnings as well as its growth prospects in the near to medium term,&rdquo UOBKH added.

 

SEIL&rsquo s acquisition price also implies an annualised FY2022 price-to-earnings ratio of 10.2 times and a price-to-net tangible assets value of 1.03 times, which UOBKH views as &ldquo largely fair&rdquo given the present market environment around coal-related assets.

 

On Sept 9, Sembcorp Industries (SCI) announced the proposed sale of Sembcorp Energy India Ltd (SEIL) for the equivalent of $2.058 billion, or 1.0x NAV. This so-called purchase price is subject to certain adjustments on and after the date of completion which could either be upwards or downwards depending on condition.

 

The purchaser is the Tanweer Consortium led by Oman Investment Corporation S.A.O.C. (OIC), the Ministry of Defence Pension Fund, Oman (MODPF) and Dar Investment SPC (Dar Investment).

 

SCI has issued corporate guarantees in favour of certain international and local banks in relation to certain existing term loans and working capital facilities with maturity dates ranging from 2022 to 2037, for $740 million of which $467 million has been drawn down. These guarantees may continue post-completion, SCI&rsquo s announcement says.

 

On completion, Tanweer Consortium will settle the entire final purchase price by way of the Deferred Payment Note (DPN) via a facility provided by SCI under the DPN. The DPN will bear interest at a rate per annum equal to 1.8% plus a benchmark rate equal to the Indian government 10-year bond yield spot rate, minus a greenhouse gas (GHG) emissions intensity reduction incentive rate (GHG Reduction Incentive Rate). This GHG Reduction Incentive Rate can be as high as $40 million according to SCI' s management, that is, Tanweer Consortium could save $40 million in interest payment if SCI achieves certain emission targets for SEIL.

 

All outstanding payment obligations under the DPN should be payable in full on the 15th anniversary date of the completion, which is also the maturity date. If these obligations have not been met, the maturity date will be extended for two years, and for every two years till the monies are paid. The maturity date will not be extended beyond the 24th anniversary date of completion.

 

SCI will waive, cancel and forgive the repayment of all obligations by the Tanweer Consortium on the twenty-fourth anniversary of completion and Tanweer Consortium will not be liable for any obligation thereafter. The DPN will terminate on the 25th anniversary date of completion.

 

When asked for clarification, an SCI spokeswoman says: " The maximum term of the note corresponds to the end of the asset life. Based on SCI&rsquo s assessment, we believe that the principal of the note will be fully repaid within the term of the note. In the unlikely scenario that the principal is not fully repaid by the fifteenth year, the term of the note can be extended up to 24 years. Sembcorp will forgive the repayment of all Obligations by the Purchaser and will not take back ownership of SEIL at the end of the term of the note. This is as part of the deal discussed with the Purchaser."

 

&ldquo We feel there is interest, the market seems to be conducive and we came out with a structure that allows us to support the buyer," says SCI president and CEO Wong Kim Yin.

 

" The one thing that is weak is the lack of financing available to fund investments in coal assets. We came up with this structure to plug this gap,&rdquo he says, adding that the proposed sale will enable SCI to achieve some of its targets &ndash to decarbonise, to deconsolidate, and to protect its balance sheet and the interests of investors, employees, lenders and so on.

 

&ldquo The proposed sale allows us to accelerate our transition from brown to green, and allows us to achieve key objectives and to move forward with a trusted partner, and protect the interests of all stakeholders including lenders. We remain committed to the brown to green journey,&rdquo Wong says. He adds that the transaction is subject to an EGM.