Sembcorp Industries – Recycling capital

Excerpts from Maybank report

Sembcorp Industries Ltd (SGX: U96)

Accretive divestment of non-core business, BUY

On Friday, Sembcorp Industries (SCI) announced sale of SembEnviro, a waste management services provider, for SGD405m, at a 43% premium over book value. SCI will use the sales proceeds to invest further in the energy business to achieve the 2028 strategic roadmap. Based on divestment gains and financial cost savings from debt repayment, we estimate mid-single digit earnings accretion. Notwithstanding the higher yields and uncertainty over the energy transition policy, we maintain our rating and estimates given the steady execution of strategy and fair valuation of the stock.

Waste to energy

A wholly owned subsidiary of PT TBS Energi Utama (TOBA IJ, NR, IDR520) will acquire 100% of the business from Sembcorp Industries. The sale price has been arrived at on a ”willing buyer, willing seller” basis and will expand the buyer’s regional waste management platform in Indonesia and Singapore as it undergoes the green business journey for its diverse business portfolio. Sembcorp Industries will use the proceeds to further its strategic plan to sharpen its focus on growth in the energy sector and drive energy transition.

Aligning with strategic targets

Earlier, Sembcorp Industries had proposed purchase of 30% stake in local power producer, Senoko Energy. We believe part of the proceeds may be used to finance the purchase. Based on pro-forma disclosures, the transaction will be 3.4% accretive to NTA and 13.4% to EPS. This includes divestment gain of SGD114m. Excluding the gains and factoring in financing savings, we estimate c.4-5% earnings accretion. Further, Sembcorp Industries had announced in the 1H results the cessation of the public cleaning contract for the Central-North region from end-Sep 2024. As such, the proposed sale should mitigate any adverse business impact from the non-renewal of the contract.

Maintain BUY

Sembcorp Industries is Singapore’s leading sustainable solutions provider with ~14GW of capacity in renewables and over 12000ha of project portfolio across Asia. Temasek’s 49.5% ownership offers Sembcorp Industries backing and helps to secure attractive financing terms when SCI bids for projects around the world. Sembcorp Industries targets to increase sustainable solutions to 70% of net profit by FY25E, increase installed renewables to 10GW and develop sustainable urban solutions to 500ha. Portfolio scale and diversity will differentiate it from other power generation companies in Singapore in terms of reliability, flexibility and its comprehensive ability to offer energy, urban and water solutions. Our estimates are unchanged pending completion of the sale. Healthy growth of monthly peak electricity demand YTD at 3.7% YoY, the highest since 2011 (excl. 2021 reopening), is beneficial. Valuation at 10x FY25E PE and 1.5x PB is below historical mean (10.7x and 1.9x).

You can find the full report here and the company website here.