Sembcorp Industries: Is the Stock a Buy After India Coal Plants Sale?

Sembcorp Industries India coal sale

Tim Phillips

September 6, 2022

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Investors in Singapore are probably familiar with the investing possibilities behind the transition to clean energy.

That’s because companies, globally, are thinking about how to reach “Net Zero” in regards to their carbon emissions.

That will benefit specific companies. Locally, one of the biggest providers of green energy is Sembcorp Industries Limited (SGX: U96).

Having shed itself of the laggard Sembcorp Marine Ltd (SGX: S51) via a demerger, Sembcorp Industries could focus solely on its power assets.

On Monday (5 September), Sembcorp Industries (also known as SCI) announced that it would be selling 100% of its stake in two Indian coal-fired power plants.

So, is the stock a buy after the latest deal? And what should investors know about its overall business? Let’s find out.

Going green for the long term

The proposed deal will see Tanweer Infrastructure – which is indirectly owned by Oman Investment Corp – buy two coal-fired power plants in India owned by SCI.

The transaction cost comes in at INR 117 billion (S$2.1 billion). The cash won’t be made immediately available though as the payment method is through a “deferred payment note” (DPN).

Essentially, what this means is that SCI will be repaid by Tanweer over a number of years.

Overall, it’s a positive deal for SCI and shareholders. Why? Because the company has been talking about transforming its portfolio “from brown to green”.

That means focusing on its renewables business rather than carbon-emitting power assets like coal.

Post the deal, SCI’s renewables capacity – as a percentage of overall power capacity – will move up to 51% (from 43% at the end of H1 2022).

Furthermore, the deal will accelerate renewables share of SCI’s overall net profit. That figure only amounted to 25% of net profit in the first half of this year (see below).

However, the company is ambitious in aiming to move that percentage up to 70% by 2025 – only three years away.

SCI renewables share profit

Source: Sembcorp Industries H1 2022 earnings presentation

Benefitting from inflation

One of the key reasons why Sembcorp Industries stock has done so well in 2022 – it’s up 73% year-to-date – is that its business has benefitted from rising power prices.

And as one of the key providers of clean electricity in Singapore, it has demonstrated pricing power. In addition to that, sheeding legacy power assets over the past few years has helped the firm broaden its potential investor base.

With a Return on Equity (ROE) of an annualised 23.1% in H1 2022, SCI saw a marked improvement in its ROE profile versus the year-ago period (8.5%).

Unsurprisingly, the first half of 2022 saw both revenue and net profit surge for SCI (see below).

SCI H1 2022 metrics

Source: Sembcorp Industries H1 2022 earnings presentation

Pays a dividend, too? Yes please

For Singapore investors, we all love dividend-paying stocks. Thankfully, SCI happens to be one. It recently increased its first-half dividend per share (DPS) by 100% year-on-year to 4 Singapore cents.

Assuming a similar dividend for its FY2022 final dividend (a conservative assumption), then Sembcorp Industries stock is currently yielding a decent 2.3%.

Finally, one less talked about factor is the “scarcity value” that SCI possesses. What do I mean?

Well, if there are only a certain number of “clean energy” stocks in a market, then a higher valuation will be attached to them given the opportunity set for investors is limited.

This is what SCI benefits from. There isn’t another large renewable energy provider listed on the Singapore Exchange (SGX).

With multiple tailwinds behind the business, SCI looks to be going from strength to strength. For investors, this latest deal seems to back that up.

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips owns shares of Sembcorp Industries Limited.

About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer. In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.