Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-03-24: Modi’s Election Victory Could Accelerate PPA Awards

Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-03-24: Modi’s Election Victory Could Accelerate PPA Awards SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries (SCI SP) - Modi’s Election Victory Could Accelerate PPA Awards

  • Narendra Modi’s BJ party victory in Uttar Pradesh paves the way for them to secure majority control in the Indian Parliament. A majority representation would be a positive for continued efforts to reform the power sector. 
  • Power purchase agreement (PPAs) awards could also accelerate, which would be beneficial to Sembcorp Industries (SCI)’s Sembcorp Gayatri Power Limited (SGPL) plant. This would provide earnings visibility, though the earliest earnings pick-up is in 2018. 
  • SCI remains our preferred long-term utilities play. 
  • Lower target price to S$3.78. Maintain BUY.



WHAT’S NEW


Narendra Modi’s BJP secures victory in Uttar Pradesh. 

  • On 11 March 2017, the Bharatiya Janata Party (BJP), led by Narendra Modi, won control of Uttar Pradesh (UP) a state with the biggest majority since 1980. Nearly four in 10 voters backed the party, paving the way for a stronger BJP representation in India’s upper house of parliament.


STOCK IMPACT


BJP majority win paves the way for economic reforms. 

  • UP is politically important as it holds the highest number of parliament seats per state. In India, it is said that the party that wins UP rules the country. The win will strengthen BJP’s position in parliament, and see its economic reform efforts and other party initiatives get pushed through more easily. These efforts were previously hindered by the party’s lack of majority representation.

PPA awards could accelerate in 2H17. 

  • Power purchase agreement (PPAs) awards are currently in limbo as elections take centre stage in the country. A BJP majority win could see a hastening of the award process due to reduced political red-tape. This will undoubtedly help the situation at SCI’s SGPL which is in need of a long-term PPA to be economically viable. 
  • While an acceleration is naturally positive, it does not necessarily translate to immediate economic benefits as it is dependent on the supply timeframe specified in the agreement.

Still a loss for SGPL in 2017 even if a PPA starts this year. 

  • Even if a PPA were to be signed and kicked in during 2H17, SGPL is expected to make a loss for 2017. However, the contract will provide earnings visibility for 2018 and beyond, signalling the beginning of India’s earnings recovery.


EARNINGS REVISION/RISK

  • Our earnings estimates remain unchanged.

VALUATION/RECOMMENDATION


Maintain BUY, with lower target price of S$3.78. 

  • We continue to take a long-term view on SCI, reflected in our valuations. Our SOTP target price of S$3.78 is pegged to 2018F earnings and assumes a blended 9.8x 2018F PE (previously 10.6x) for the Utilities business. This is derived from the earnings weighted average of each businesses’ geographic PE, and also reflects the sector’s changes since our last update. 
  • Share price could see weakness over 2017 as earnings disappoint. Key risks remain in the financial health of the DISCOMs, which could jeopardise payments.
  • Ultimately, the situation in India should pan out and SCI realises its India growth story.
  • For now, we recommend looking beyond the obvious hiccups this year, picking up the shares on weakness to ride the earnings story in 2018. Maintain BUY.




Foo Zhi Wei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-24
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.78 Down 3.950



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