Is This An Early Ang Bao For SembCorp Industries Limited?

SembCorp Industries Limited (SGX: U96) announced a major deal yesterday. The utility and marine giant had signed an agreement to acquire a 60% stake in Green Infra, a renewal energy company in India with operations in wind and solar. The deal is valued at approximately Rs 10.6 billion or S$227 million.

A little context

As alluded to earlier, SembCorp Industries is primarily in the utilities and marine business. It has operations in six continents worldwide.  The marine segment comes mainly from the company’s 60% ownership stake in SembCorp Marine Ltd (SGX: S51). You can get three different but equally important views about SembCorp Marine here.

Coming back to SembCorp Industries, the new deal will fall under the utilities segment, which makes up a significant part of the company’s overall business. As you can see below: For the financial year ended 2013, this segment made up some 47% of SembCorp Industries’ total revenue.

sembcorp industries revenue breakdown

Source: SembCorp Industries’ Earnings Report

Now for some quick notes on the deal:

  1. SembCorp Industries will be indirectly investing alongside the government of India. The remaining 40% stake for Green Infra will be held by IDFC Private Equity Fund III, a fund managed by IDFC Alternatives. IDFC Alternatives is an entity owned by IDFC Limited, which is in turn 16.4% owned by the government of India.
  2. Green Infra has an operating asset portfolio of 516-megawatts (MW) and has other assets under development which will grow its total power capacity to 700 MW by 2015.
  3. Of the 700 MW, wind energy contributes 665 MW with the rest coming from solar. This deal will triple SembCorp Industries’ renewable energy portfolio to more than 1,000 MW. In the grand scheme of things, this would make up at least 10% of SembCorp Industries’ stated goal of achieving a power capacity of 10,000 MW by 2015.
  4. Green Infra might provide recurring income for SembCorp Industries as well. A major part of Green Infra’s electricity output is sold under long-term power purchase agreements with India’s state electricity boards, with the rest going to commercial customers.
  5. The transaction is expected to close at the end of this month. It will be funded by a combination of internal funds and debt. For context, SembCorp Industries had $2.2 billion in cash and equivalents and $4.5 billion in borrowings as of 30 September 2014. Given these, the S$227 million deal likely wouldn’t be much of a problem for SembCorp Industries.

Here’s some comments about the deal from SembCorp Industries’ Chief Executive Officer Mr. Tang Kin Fei:

“This acquisition will provide Sembcorp with a platform to grow our renewable energy business. Green Infra’s strong capabilities and experienced team will help to accelerate our growth in the renewable energy sector not only in India, but globally. Meanwhile, with investments in both thermal and renewable energy, Sembcorp is well-positioned for growth in the energy sector with a balanced portfolio of energy assets.”

Foolish summary

The stock market has not been kind to SembCorp Industries lately. Since the start of 2014, the company’s share price has nose-dived by more than 20% likely due to concerns about the Marine side of its business.

The deal does a few things for SembCorp Industries. It adds to the company’s recurring income (which can help it tide over rough patches in the oil and gas industry); it extends the company’s reach further into India; and it helps expand the company’s energy portfolio in the renewal energy sector.

Overall, it might be a long term positive for SembCorp Industries.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.