UBS has issued a report valuing Sembcorp Industries (SCI) at $7.65 per share, up from its last done share price of $6.13 on Nov 24. The rationale is that SCI could unlock $3.5 billion to $5.5 billion in proceeds from its Indian portfolio if it were fully monetised.
“Amid news reports that SCI is exploring acquisitions in Australia and Thailand, we consider how much proceeds the company could generate, and profits that could be recognised, in a potential capital recycling exercise. Our conclusion: We estimate that SCI could potentially unlock between $3.5 billion - $5.5 billion in gross proceeds if it were to fully monetise its India RE (renewable energy) portfolio. The actual amount recognised would depend on the stake that SCI eventually retains,” a recent UBS report says.
UBS assumes that the portfolio is valued as cash-generating. These assets are currently under construction. Secondly, the average feed-in-tariff (FiT) of Rs3/kWh reflects a mix of vanilla (< Rs3) and hybrid (> Rs3) renewable energy projects. The third assumption is an aggressive Ebitda margin of 90%, and profit margins of 25%. Projects take time to stabilise and this third assumption is extremely optimistic based on a short-term time frame.
Fourth, UBS assumes a loan-to-value of 70% with an average cost of debt of 7.5%, which is also on the optimistic side.
UBS compares the potential valuation of SCI’s Indian portfolio to Adani Green Energy and NTPC Green Energy which are valued at 11 times to 14 times EV/Ebitda and at PE ratios of around 35 times.
Based on an 11 times EV/Ebitda, EV or enterprise value works out at $8 billion, the report reasons. “We estimate SCI could unlock $3.5 billion in gross proceeds after paying down debt,” UBS says. If SCI decides to retain 50% of the portfolio based on the $3.5 billion value unlock, gross proceeds could amount to $1.7 billion. SCI has 1,776 million shares outstanding. “This could bring SCI's 2027 net debt / equity ratio down to 1.0-1.2 times from 1.6 times,” UBS says, adding that the negatives have been priced in.
UBS has a target of $7.65 with a buy rating for SCI.
