SCI announced on Dec 11 plans to 100% of Alinta shares from Chow Tai Fook Enterprises, which has owned Alinta since 2017. The deal will be fully funded by cash and a bridging loan until long-term financing is in place
Besides describing the transaction as one that “advances” the company’s strategy to strengthen its renewables business and deliver immediate earnings accretion, SCI says that it is also gaining a foothold in an “AAA-rated country with significant growth opportunities”.
Approaching from the perspective of net profit, Lim and Kande view the purchase at 21 times historical P/E to be on the expensive side for SCI. They note that the deal is accretive with pro forma earnings to rise by 14% to $140 million or EPS to 65 cents and ROE to 22.5% for the last twelve months ended June 30.
Post-acquisition, the ratio of net debt to ebtida will rise to 4.6 times from 3.6 times for the pro-forma period used. SCI is confident that it can uphold its 23 cents DPS and is optimistic for a higher payout percentage.
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The CGS analysts did not share any strong opinion on Alinta’s business but suggest the possibility of market reservations about SCI adding coal into its portfolio via Alinta. They also note management’s optimism on the retail tariff outlook as the energy transition proceeds.
Lim and Kande are keeping their eyes on the potential listing of SCI’s Indian renewable energy unit which could spark a re-rate. Regulatory risks and prolonged shutdowns of operations could impact the counter.
Meanwhile, after the deal, JP Morgan analyst Sumedh Samant downgraded SCI to ‘neutral’ from ‘overweight’. The TP was cut 21% to $5.90 from $7.50.
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Samant compares Alinta’s valuation to its peer AGL Energy on two metrics — ratio of enterprise value to adjusted ebitda and PE — and finds that AGL is cheaper.
He is also cautious about SCI’s share price and believes the counter is entering a “new price-discovery phase”. He reasons that the size of the deal at more than 50% of SCI’s market capitalisation, an increase in leverage and the addition of a coal-fired power plant to its portfolio could prove impactful in the short-term.
With margin declines for gas in Singapore, Samant also suggests limited upside for SCI’s existing portfolio until the new hydrogen-ready power plant commences operations from the second half of 2026.
As at 4.08pm, SCI shares are trading at around $5.93, up 12 cents or 1.9%.
