Sembcorp walks the ‘green’ talk with sale of Indian coal power assets

UTILITIES giant Sembcorp Industries (SCI) has walked an extra mile on its “green” talk with the recently announced plan to sell a 100 per cent stake in one of India’s largest independent power producers, Sembcorp Energy India (SEIL).

This sale involving 2 “supercritical” coal-fired plants in India, totalling 2.6GW, for S$2.1 billion to Oman’s Tanweer Infrastructure is quite possibly Sembcorp’s most deliberate and decisive move since it unveiled a brown-to-green transformation roadmap in May 2021 and pledged to no longer invest in new coal-fired energy assets.

A potential sale of its conventional energy assets, apart from adding renewable energy projects to its stable, has always been on the table for Sembcorp, which has armed itself with measurable and clear goals to transform its massive energy portfolio. The sale of fossil-fuel powered plants, however, is trickier than the long game of clean energy, as many of the markets it operates in still chiefly rely on traditional sources to power energy needs.

The SEIL sale swings the needle for Sembcorp’s energy portfolio mix. When the deal is completed, just over half or 51 per cent of the company’s energy capacity will comprise renewable energy – up from 43 per cent. In addition, on a pro forma basis, Sembcorp’s share of net profit from its sustainable solutions portfolio for the first half of 2022 will increase from 25 per cent to 31 per cent, bringing it a step closer to its 70 per cent target by 2025.

In terms of intensity of carbon emissions, the reduction is no less marked: from 0.51 tCO2e (tonnes of carbon dioxide equivalent) per Mwh (megawatt hour) to 0.32 tCO2e/MWh, surpassing its 2025 target of reducing the emission intensity to 0.40.

Analysts had very little to nothing to quibble about in terms of pricing: Priced around book, the divestment value of SEIL is deemed fair given the current market environment for coal-related assets. In fact, it won some recognition.

“SCI is emerging as a key leader in Asean’s decarbonisation story,” said Morgan Stanley following the announcement. The house added: “SCI is successfully navigating what some investors thought an ‘impossible trinity’ of growing dividends and managing returns while expanding its renewables portfolio”.

CGS-CIMB Research, meanwhile, raised the stock’s target price to S$4.78, from S$3.80, adding that its “successful decarbonisation efforts could lead to premium valuations” ascribed to the “only pure renewable energy proxy in Singapore.”

Indeed, Sembcorp shares have shone this year. According to Geoff Howie, market strategist at the Singapore Exchange, the counter is the fifth highest recipient of net institutional inflow this year, after Singtel, OCBC, Keppel Corp and City Developments.

As of Sep 26 (Monday), Sembcorp stock had generated a 54 per cent price return. Including dividends boosts the total return to 57.6 per cent. That isn’t shabby at all, more so given the trilemma facing utilities players to grow dividends and their green portfolio while managing returns.

The sale is also unfolding at a time when the company, 49.5 per cent owned by Temasek Holdings, is benefitting from high energy prices, particularly for its conventional energy sources. For the first half ended June 2022, Sembcorp’s net profit jumped 94 per cent to S$490 million on the back of a 45 per cent rise in revenue to S$4.8 billion. A better showing by the conventional energy segment was the chief reason, as net profit from this segment more than doubled to S$397 million due in a big part to higher electricity prices in Singapore and India as well as rising demand.

The buyer of SEIL will settle the purchase via a deferred payment note (DPN) provided by Sembcorp. Sembcorp has said it was financing the transaction given challenges doing so via bank debt for coal-fired power plants. This is understandable given doubts over the long-term viability of fossil fuels, rising environmental consciousness and the global race towards net-zero emissions.

In short, and as Morgan Stanley pointed out in its report, Sembcorp’s move to divest its coal power assets in India is more of a conversion from equity ownership into a largely unsecured emission-linked rupee bond. And as the payments to the bond are secured by cashflows from the 2 plants, Sembcorp remains exposed to the downsides of cash flow risks from these assets.

In the bigger scheme of things, while the divestment could be one of the fastest ways for Sembcorp to meet its own carbon goals, an ownership change in the coal-fired assets brings little change to the planet. More so as coal is regarded the most polluting and least efficient fossil fuel. That may be something the giant company may want to pay more attention to as it navigates its brown-to-green roadmap.