Sembcorp’s Alinta Energy buy: One step forward on earnings, two steps back on emissions?

[SINGAPORE] Sembcorp Industries’ acquisition of Alinta Energy is a “half-full” and “half-empty” deal, said Citi Research analyst Luis Hilado.

In his late-night note on Thursday (Dec 11), he stated that the deal was half-full on earnings per share accretion, and half-empty as it will set Sembcorp’s decarbonisation targets back.

Sembcorp announced the deal to buy Australia’s fourth-largest utilities provider after market close on Thursday. It will pay Alinta’s current owner, Hong Kong-based holding company Chow Tai Fook Enterprises, A$5.6 billion (S$4.8 billion) in cash through bridge and working capital facilities for an agreed enterprise value of A$6.5 billion.

While the company said the move will add “meaningful scale and diversification to Sembcorp’s portfolio”, Hilado pointed out that the acquisition includes Alinta’s 1.2 gigawatt coal-fired power plant, which will “initially” take Sembcorp’s decarbonisation targets “backwards”.

Carbon emissions in focus

Recent projections put Sembcorp’s carbon emissions intensity on a downward trajectory. The integration of Alinta’s coal assets in 2026 will reverse this trend, raising emissions intensity to an estimated 0.26 tonne of carbon dioxide equivalent per megawatt hour of power by 2035.

This puts the group well off course for its 2028 target of 0.15 tonne of carbon dioxide equivalent per megawatt hour of power.

However, Sembcorp management had said that its interest in Alinta was driven by the renewables pivot, not by the Latrobe Valley Power-owned Loy Yang B coal-fired power station.

The acquisition thus enables scalable investments in renewables and balances the firm’s portfolio towards developed markets, said Sembcorp.

Alinta has 10.4 gigwatts of development projects that are largely in renewables, which will eventually “surpass” the coal-fired plant.

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While the coal-fired plant will represent less than 5 per cent of Sembcorp revenue, CGS International analysts Lim Siew Khee and Meghana Kande said in a Friday (Dec 12) note that the market could “take time to accept the addition of coal exposure”.

A strong financial decision?

The deal is also a financially strong one for Sembcorp, said Citi’s Hilado.

The Singapore company is acquiring Alinta at an implied valuation of seven times its enterprise value to earnings, he said. That is a steep discount compared with Sembcorp’s own trading valuation of about 10 times.

However, CGS International’s Lim and Kande said the acquisition at 21 times historical price-to-earnings seems “steep” from a net profit perspective, athough it is earnings accretive.

Hilado shared the sentiment, noting that it will likely be accretive even when accounting for interest costs on the A$6.5 billion debt facility, projected at about 3.5 per cent.

He noted that the deal could boost pro forma underlying profit by 22.5 per cent, and enhance return on equity by a significant 460 basis points – or 4.6 per cent.

For shareholders, Sembcorp management committed to maintaining a dividend per share of at least S$0.23, with upside potential as earnings improvements from the Alinta purchase materialise.

CGS International’s analysts reiterated an “add” call, but cut Sembcorp’s target price from S$8.02 to S$7.77 with earnings adjustments. They also cautioned downside risks of unfavourable regulatory changes impacting operations and prolonged shutdowns.

Citi’s Hilado also maintained a “buy” call with a S$7.84 target price, warning of downside risks of negative earnings surprises at existing businesses, further asset impairments (particularly in India) and execution risks on renewable energy projects.

Shares of Sembcorp closed on Thursday down 0.3 per cent or S$0.02 at S$5.82, before the update.