Sembcorp Industries - CIMB Research 2017-08-31: Making The Best Of It

Sembcorp Industries - CIMB Research 2017-08-31: Making The Best Of It SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Making The Best Of It

  • Increasing the stake in wind power asset Sembcorp Green Infra (SGI) in India from 72% to 100% is a natural step to lift India’s profits. The increased stake could lift utilities earnings by S$6m p.a.
  • We estimate Sembcorp Industries (SCI) is paying c.39x FY18 P/E. On EV basis, the company noted that it is paying US$1.3m/MW, cheaper than the latest transaction by peer of US$1.8m/MW.
  • Together with the higher stake in SGI and interest cost savings in Sembcorp Gayatri Power Limited (SGPL), we estimate India will turn around with a profit of S$11m in FY18F vs. a loss of S$18m in FY17.
  • Singapore has bottomed out thanks to more off-take of steam and integrated utilities from JAC as Exxon completes its acquisition of the troubled plant.
  • We see buying opportunity in recent share price weakness.



Pay for good assets 

  • Sembcorp Industries (SCI)’s increased stake in its Indian wind subsidiary - SGI, from 72% to 100% at S$301m implies that it is paying a forward P/E of 39x, on FY18F profit of S$27m. We see this move as necessary to improve India’s profit while waiting for the PPA for SGPL. 
  • Sembcorp Green Infra (SGI) operates seven power assets in India – Madhya Pradesh, Gujarat, Karnataka, Maharashtra, Rajasthan, Andhra Pradesh and Tamil Naidu – with a total operational capacity of c.925MW and 250MW under development. To date, SCI has invested c.S$652m in SGI.


Impact from Monsoon not alarming 

  • The average power dispatched by Thermal Powertech Corporation India Limited (TPCIL) in Aug still held up at 1,100MW/day (2Q17 average: 1,094MW/day). For less than a week during the month, it dispatched 880MW/day which we believe could be due to intensified rainfall, power supply from hydro power and power distribution company replacing some thermal power with hydro.
  • TPCIL is likely to keep its plant load factor (PLF) at c.90% (2Q17: 91%) with a net profit of S$15m in 3Q17.


SGPL hopes to milk some spike in spot prices 

  • SGPL’s unit 1 was shut down in July for c.3 weeks, with power dispatched dropping to c.535 MW/day (2Q17 average: 970MW). 
  • Utilisation picked up again in Aug to c.928MW/ day, as the plant was able to replace the expired 300MW 1-year contract with Telangana (average tariff of Rs4/kwh) with spot and alternate supply contracts. 
  • We take slight comfort that spot prices in Andhra Pradesh and Telangana rose to Rs3.21 per kWh in Aug (2Q17: Rs2.91kw/h), due to some plant outage and weather effects.


Likelihood of India turning around in FY18F is high 

  • Together with the higher stake in SGI and interest cost savings in SGPL, we estimate India will turn around with a profit of S$11m in FY18F vs. a loss of S$18m in FY17.
  • Seasonally high wind load factor for SGI in 3Q17 will also help to swing India into a profit of S$9m-10m from a loss of S$3m in 2Q17.


Back home, JAC is up and running and gas optimisation continues 

  • Early this week, Exxon Mobil announced the completion of its acquisition of Jurong Aromatics Corporations (JAC) on Jurong island. This should ensure steady demand for steam, industrial water and wastewater treatment services of SCI under the > 20-year contract. Upside could come from the reversal of S$16m provision for doubtful debts made in 2015.


Maintain Add 

  • We raise our FY18-19F EPS by c.1% to reflect higher profits from India. 
  • Excluding SMM, SCI Utilities is trading at 8x forward P/E and 0.6x P/BV vs. ROE of c.6.9%. We see the recent share price weakness as a buying opportunity. 
  • Maintain Add and SOP-based TP of S$3.47. 
  • Catalysts include stronger-than-expected recovery in Singapore and India. 
  • Key risks include prolonged unplanned shutdown of operations and asset impairment.





LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-08-31
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.470 Same 3.470



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