Sembcorp’s Alinta Energy buy: One step forward on earnings, two steps back on emissions?
Sembcorp says acquisition driven by Alinta’s renewables pivot and not by its Loy Yang B coal-fired power station
[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), Hilado 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, about 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
According to recent projections, Sembcorp’s carbon emissions intensity was on a downward trajectory. The integration of Alinta’s coal assets in 2026 will reverse this trend, causing emissions intensity to spike 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.
It also enables scalable investments in renewables and balances the firm’s portfolio towards developed markets.
However, Sembcorp management had said that its interest in Alinta was driven by the renewables pivot and not by the Latrobe Valley Power-owned Loy Yang B coal-fired power station.
Alinta has 10.4 gigwatts of development projects that are largely in renewables, which will eventually “surpass” the coal-fired plant, which will represent less than 5 per cent of Sembcorp revenue, said Hilado.
The deal is also a financially strong one for Sembcorp, said the analyst.
The Singapore company is acquiring Alinta at an implied valuation of seven times its enterprise value to earnings, a steep discount compared with Sembcorp’s own trading valuation of about 10 times.
Even when accounting for interest costs on the A$6.5 billion debt facility, projected at about 3.5 per cent, the transaction is expected to be earnings accretive, said Hilado.
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.
Shares of Sembcorp closed on Thursday down 0.3 per cent or S$0.02 at S$5.82, before the update.
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