Sembcorp&rsquo s potential India spin-off

 

Sembcorp Industries&rsquo latest annual report strikes optimistic notes on renewable power in China and India, feeding speculation about potential moves to recycle capital in those markets.

 

The shareholders&rsquo note comes amid recent reports that Sembcorp is undertaking a strategic review of its business. Citing sources, Bloomberg reported in March that Sembcorp has appointed a financial adviser for the review.

 

Sembcorp said in response that it is always assessing options to enhance shareholder value, and that the assessments may not result in any transaction. The company said it will make the necessary announcements if any action is material and has progressed to a stage where there is a high level of certainty.

 

Although the company did not mention what options it might be assessing at this time, analysts speculate that the company could be looking to recycle capital in China or India.

 

OCBC Global Markets Research notes that when Sembcorp announced its 2023-to-2028 strategy in 2023, the company mentioned in-country capital recycling platforms for China and India renewables.

 

Indeed, Sembcorp plans to invest S$14 billion into its sustainability transition between 2024 and 2028, and this money&rsquo s got to come from somewhere. Sembcorp has said that it expects to fund half of that from operating cash flows, and a further 30 per cent from project debt. The remaining 20 per cent, or almost S$3 billion, is expected to come from corporate debt, capital recycling and partnerships.

 

If Sembcorp decides to sell some of its renewables assets to recycle capital, India might be the place to start.

 

DBS analyst Ho Pei Hwa observes that &ldquo the time looks ripe for securitisation of India renewable assets&rdquo , based on the size of the Indian portfolio.

 

As a market for a capital recycling programme, India ticks many boxes.

 

The first is the size of its operational portfolio and, just as importantly, the size of its pipeline to sustain a programme. For instance, if Sembcorp decides to sponsor and list a renewable infrastructure trust, it would need to have enough revenue-generating assets to place into the trust and then have a pipeline of projects that can be sold to the trust down the road.

 

As of end-2024, Sembcorp reported about 5.4 gigawatts (GW) of attributable wind and solar capacity in India, half of which is installed and the other half is in the pipeline, either secured or under construction. That represents about half of Sembcorp&rsquo s entire installed and pipeline wind and solar capacity. India has a further 300 megawatt hours (MWh) of energy storage capacity being built in the country.

 

Sembcorp describes the Indian renewables space as a &ldquo growth market&rdquo , although it has not disclosed profitability figures for this segment of its portfolio. That growth is underpinned by India&rsquo s national policy to achieve 500GW of installed electricity capacity from non-fossil sources by 2030.

 

Most of Sembcorp&rsquo s assets in India are also wholly owned through subsidiary Sembcorp Green Infra, which makes it easier to package those assets for securitisation.

 

It&rsquo s a different story for Sembcorp in China, where most assets are held through joint ventures in which Sembcorp only holds a minority interest. Although the 3.9 GW of attributable installed and upcoming wind and solar capacity in China accounts for 36 per cent of Sembcorp&rsquo s global wind and solar portfolio, only a quarter of that &ndash about 1 GW &ndash is 100 per cent owned by Sembcorp. That could complicate spinning out those assets.

 

The China renewables market is also undergoing some turbulence, which might dampen valuations if the portfolio were to be put on the market today.

 

In north-western China, an oversupply of renewable electricity has led to increased curtailment, or forced reduction of power generation. This was a major factor in Sembcorp&rsquo s renewables net profit before exceptional items slipping 9 per cent to S$183 million in 2024. Sembcorp also took a S$19 million provision for receivables in China and lower wind speeds in India.

 

The China renewable electricity pricing outlook is also uncertain, with the government moving to a market-based pricing mechanism for on-grid renewable plants commissioned from Jun 1 onwards. Sembcorp says it is monitoring economic and regulatory developments in China and the impact on its China portfolio.

 

All of that notwithstanding, any spin-offs are probably on the shelf at this moment with global markets in turmoil following the US imposition of across-the-board import tariffs. Launching a listing of assets now would be selling into a historically bad market.

 

If and when markets stabilise, however, an India spin-off could well return to the table for Sembcorp.

 

Net zero

 

Fading chances for levy

A proposal for a global carbon levy on international shipping seems increasingly unlikely to gain enough support at the ongoing International Maritime Organisation&rsquo s Marine Environment Protection Committee meeting in London.

 

While the levy has support in Europe and many small island countries, opposition from a number of major shipping countries makes it politically pointless to push through the measure. Countries that have opposed the levy include Brazil, China, Indonesia, Malaysia, South Africa and Thailand. This week, the US also announced its opposition and withdrew from the meeting.

 

There are two alternative proposals to the levy on the table. The first &ndash termed the International Maritime Sustainable Fuels & Fund, or IMSF& F &ndash is a credits-based alternative tagged to emissions intensity requirements. Ships that fail to meet the emissions intensity threshold can either buy credits from ships that do better than required or pay the equivalent to a global fund that will be used, among other things, for decarbonising the sector.

 

The second alternative &ndash proposed by Singapore and called J9 Bridge &ndash is positioned as a compromise measure and is currently the base approach that is being negotiated in London. The J9 Bridge proposal also relies on credits, as with IMSF& F, but introduces compliance tiers so that the greater the underperformance, the heavier the penalty. The tiers aim to address criticisms that a credits-based system will be insufficient to drive decarbonisation quickly enough in the maritime sector.

 

While J9 Bridge appears to be a leading candidate at the moment, it has drawn its share of criticism, with opponents arguing that it won&rsquo t raise enough money for the global fund to support meaningful change. There&rsquo s also concern that credit-based systems can lead to the lock-in of liquefied natural gas as a fuel as shipowners adopt short-term solutions. Furthermore, some critics say that it is challenging to assess J9 Bridge properly because key aspects of the approach have not been decided, such as where to set the tiers.

 

Regardless of the outcome, the maritime sector pathway towards net zero will probably be more back-loaded without the levy. This could increase transition risks in the coming years for the sector.

Annual report shows a fall in CEO Wong Kim Yin&rsquo s FY2024 remuneration

 

[SINGAPORE] Sembcorp Industries is &ldquo well-positioned&rdquo to achieve its target of 25 gigawatts (GW) of gross installed renewables capacity by 2028, said the company&rsquo s chairman and chief executive in its FY2024 annual report.

 

The company&rsquo s gross renewables capacity stands at 17 GW as at February, &ldquo a notable increase from 12.9 GW a year ago&rdquo , said Sembcorp chairman Tow Heng Tan and chief executive Wong Kim Yin in the report, released on Tuesday (Apr 1).

 

&ldquo Looking ahead, renewables growth across South-east Asia, China, India and the Middle East is expected to remain robust,&rdquo they said, adding that the company will &ldquo maintain a disciplined approach to pursuing opportunities in these markets&rdquo .

 

Sembcorp&rsquo s renewables focus comes even though it failed to meet one of the green targets it had set for 2025: to derive 70 per cent of its net profit from the sustainable solutions business. The proportion was lower due to the strong growth in its gas business.

 

Separately, the annual report indicated that Wong&rsquo s FY2024 total remuneration stood at S$6.4 million, down from S$7.9 million a year ago.

 

His cash bonus for FY2024 fell to S$1.6 million, from S$2.5 million previously. The bonus is based on the achievement of key performance indicators such as net profit, return on equity and environment, social and governance factors.

 

Bet on renewables, energy imports

Sembcorp&rsquo s bullishness on renewables comes even as it faces headwinds in China, with higher rates of curtailment &ndash a reduction in energy production or supply to balance out lower demand.

 

The curtailment was caused by a weaker macroeconomic outlook, as well as the country&rsquo s rapid expansion of renewables newbuild, which has outpaced the development of transmission infrastructure, said Wong and Tow.

 

&ldquo Despite these near-term headwinds, China&rsquo s renewables capacity is expected to grow, which is crucial to achieving the country&rsquo s emissions reduction targets,&rdquo they added.

 

Meanwhile, Sembcorp is seeing &ldquo strong momentum&rdquo in greenfield tenders in India&rsquo s renewables sector, securing more than 2 GW of hybrid renewable energy bids. The company also clinched its first energy storage project in India in FY2024.

 

&ldquo (Electricity) tariffs in India have improved, with our hybrid projects securing higher tariffs, underscoring our competitive edge,&rdquo said Wong and Tow.

 

Another milestone last year was the early completion of the Manah II Solar Independent Power Project in Oman. It marks Sembcorp&rsquo s first renewables project in the Middle East and is its largest utility-scale solar farm, with a peak capacity of 588 megawatts (MW).

 

The company is further growing its renewables footprint in South-east Asia. In January, it launched its first utility-scale integrated solar and energy storage project in Indonesia, the Nusantara Sembcorp Solar Energi Power Plant.

 

Sembcorp also signed a deal this year to acquire a 96 MW solar farm in the Philippines, marking its debut in the country&rsquo s renewables sector.

 

Beyond green energy, renewables import is another key focus. In December 2024, Sembcorp signed a two-year supply agreement with Tenaga Nasional to import 50 MW of renewable energy from peninsular Malaysia to Singapore. This is the first import with renewable energy certificates into Singapore.

 

Sembcorp is also exploring the import of electricity from Sarawak via subsea cables.

 

&ldquo By tapping into abundant low-carbon electricity from the region, we aim to promote the development of renewable energy in the region and contribute to realising the Asean power grid vision,&rdquo said Wong and Tow.

 

Gas resilience

Even as it focuses on the green business, Sembcorp is also seeing growth opportunities in gas. In November last year, it acquired a 30 per cent stake in Senoko Energy, one of Singapore&rsquo s largest electricity suppliers with 2.6 GW of registered gas-fired generation capacity.

 

&ldquo We believe this acquisition will enable us to further support Singapore&rsquo s energy transition,&rdquo said Wong and Tow.

 

On Apr 2, Sembcorp announced that it could further raise its interest in Senoko Energy to as much as 70 per cent.

 

In its annual report, Sembcorp noted that Senoko Energy&rsquo s assets are strategically situated in the northern region of Singapore&rsquo s grid, near energy-intensive sectors such as semiconductors. The site includes land available for the potential development of a new power plant.

 

Wong and Tow noted that Sembcorp&rsquo s gas business was resilient in 2024, despite a 34 per cent fall in Singapore wholesale electricity prices. The company expects the gas business&rsquo earnings &ndash before exceptional items &ndash to be strong in 2025, driven by its contracted portfolio and contributions from its Senoko stake.

 

In Singapore, 80 per cent of Sembcorp&rsquo s gas-fired generation capacity is secured under contracts with energy-intensive industries, such as high-tech manufacturing and data centres. Sembcorp accounts for one-third of data centres&rsquo power needs in the city-state.

 

Other moves

Separately, Sembcorp has cleared its portfolio of coal-fired power assets, with the divestment of its 49 per cent stake in Chongqing Songzao Electric Power.

 

Another divestment is the proposed sale of its waste management unit Sembcorp Environment for S$405 million.

 

Beyond energy, Sembcorp also aims to position itself as a leading low-carbon industrial park player in Asia with its urban solutions business.

 

The company aims to expand its land bank from 14,000 hectares (ha) to 18,000 ha by 2028, while scaling industrial properties from 100,000 square metres (sq m) to 1.5 million sq m.

 

&ldquo This growth will support increasing manufacturing demand, domestic consumption and the rise of e-commerce in South-east Asia,&rdquo said Wong and Tow.