Analysts from CGS-CIMB Research and Citi Research are keeping “add” and “buy” on Sembcorp Industries after the company announced, on Jan 4, that it had inked a 12-year long-term power purchase agreement (PPA) with Andhra Pradesh’s state DISCOM for its Plant 2.
The PPA was entered into by Sembcorp’s subsidiary, SEIL.
No tariff was disclosed but CGS-CIMB analyst Lim Siew Khee believes that it should be close to market rate; IEX spot prices in November to December 2021 averaged 3.33 rupees/kWh.
Based on data released by Sembcorp in 1HFY2021, SEIL 1 has contracted capacities of 570MW to Telangana DISCOMS and 500MW to Telangana and Andhra Pradesh DISCOMS. SEIL 2 has contracted capacity of 250MW to Bangladesh Power Development Board.
With the contract, Lim expects SEIL 2 to be profitable in FY2023.
“SEIL 2 has historically recorded losses since FY2016, with FY2020 registering $52 million in losses. We believe this contract will turn SEIL 2 to profitability from FY2023 onwards,” writes Lim in a Jan 5 report.
See also: RHB stays ‘neutral’ on telco sector amid fierce SIM-only competition
The development is seen as “positive” for Sembcorp’s share price.
To this end, Lim has kept her target price for the counter at $2.51, based on 15 times CY2022 P/E, which is the average of Sembcorp’s Asian peers.
Citi analyst Jame Osman concurs with Lim’s view.
See also: DBS upgrades PropNex and APAC Realty to ‘buy’ amid strong pipeline of new launches in 2025
“We believe this latest PPA will improve the profitability of Plant 2 with 66% of capacity now contracted under long-term PPA. Also importantly, this should alleviate key risk of asset impairment,” he writes in a Jan 5 report.
“Looking ahead, we think this could also position SEIL in better stead to potentially divest its India thermal energy assets (retaining its renewables business (SGI)) in the near-term, as this would also enable Sembcorp to meet its 2025 GHG emission target. In 2019, Sembcorp increased its ownership of SEIL to 100% (from 94%) and recognised its ownership interest at $1.57 billion,” he adds.
Osman has, too, kept his target price on Sembcorp at $2.52. Furthermore, he has identified the counter as his preferred pick amongst Citi’s coverage of the Singapore industrials sector.
“We believe clarity provided by mgmt. on Sembcorp’s brown-to-green transformation targets warrant a higher multiple, as peers with majority renewables exposure are commanding over 10 times EV/EBITDA,” he continues.
Shares in Sembcorp closed flat at $2.14 on Jan 13.
Photo: Sembcorp
