Sembcorp Industries Ltd - UOB Kay Hian 2016-02-29: Site Visit ~ India’s Steady Hum Of Progress

Sembcorp Industries Ltd - UOB Kay Hian 2016-02-29: Site Visit ~ India’s Steady Hum Of Progress SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries (SCI SP) Site Visit: India’s Steady Hum Of Progress 

  • We attended the launch of Sembcorp’s 2,640MW power complex in India and were given a plant tour of TPCIL. The 1,320MW coal-fired plant operated smoothly, at a higher PLF than guided. 
  • The plant was built with expansion in mind, with room for modular expansion of another 2x 660MW units. 
  • SCI plans to add an on-site ash-recycling facility to manufacture building materials. Its expansion in India remains soundly on track. 
  • Maintain BUY. Target price: S$3.80. 


WHAT’S NEW 


Attending the launch of Sembcorp’s 2,640MW India Power Complex. 

  • We were cordially invited to attend Sembcop Industries’ (SCI) launch ceremony for its 2,640MW Sembcorp Gayatri Power Complex in Nellore, Andhra Pradesh over the weekend. 
  • The power complex comprises the Thermal Powertech Corporation India Ltd (TPCIL) 1,320MW coal-fired power plant, and the NCC Power Project (NCCPP) 1,320MW coalfired power plant. 
  • Both cost an estimated US$1.5b each. SCI currently has a 67.4% stake in TPCIL, and a 49% stake in NCCPP. 


STOCK IMPACT 


• TPCIL humming smoothly. 

  • We were given a tour of the complex and its plants, as part of the ceremony. 
  • Among the two power plants in the complex, only TPCIL was fully operational, having reached commercial operation date in Sep 15. NCCPP is currently slated for full start-up by end-16. 
  • Gross capacity of TPCIL was 1,320MW (2x 660MW), with auxiliary consumption of 100MW (7.6% of gross capacity). At the point of our visit, plant load factor (PLF) was approximately 91%, above the 85-90% PLF guidance from management. 

• Fuelled by higher mix of imported coal. 

  • The plant operates using domestic and imported coal, transported by conveyor belt from the nearby Krishnapatnam Port. 
  • Current fuel mix is 60:40 domestic/imported, with intention to ramp up to 70:30. This was due to production shortfall from Coal India Ltd (CIL), resulting in SCI having to import more coal from overseas. With the fall in international coal prices, we were informed that the imported coal was almost comparable in price to domestic coal. 

• Working under long-term PPAs totalling 1,070MW. 

  • TPCIL currently has two long-term Power Purchase Agreements: 
    1. 500MW with Andhra Pradesh for 25 years, and, 
    2. 570MW with Telangana for eight years. 
  • The former was signed at a rate of Rs3.68/kWh, while the latter at Rs4.15kW/h. Combined, roughly 86% of SCI’s net capacity are under long-term PPAs, which makes it eligible for mega power status. 

• Cooled by seawater. 

  • The units are cooled using desalinated water from its desalination plant within the complex. The seawater is pumped in by pipeline from the coast 2-5km away from the complex. 

• Room for further 1,320MW expansion. 

  • During the tour, we noted the large space between the generator units and the cooling towers. Management explained that this land has been set aside for modular expansion of the plant. 
  • An additional two 660MW units of the same size could be added to the complex, resulting in total capacity of 2,640MW. The new units can be added seamlessly to existing infrastructure. 
  • Management commented that the desalination plant’s capacity would have to be re-assessed to see if it could support the new units. 
  • Generation capacity will only occur if SCI sees greater demand for electricity. 

• Innovative resource recovery: on-site ash recycling. 

  • TPCIL has an ash pit within the complex, with capacity for 15 years’ worth of fly ash. SCI plans to build an on-site ash recycling facility to convert the ash into high-quality building material. The facility is expected to be operational by end-16, with 2,200 tonnes of fly ash recycling capacity per year, and manufacturing capacity of 1,100 cubic metres of building material per day. 
  • Currently, SCI does not expect this to contribute a significant amount to TPCIL’s annual net profit, which we currently estimate at an average S$50m per year. 


EARNINGS REVISION/RISK 

  • No change to our earnings estimates. 


VALUATION/RECOMMENDATION 


• Maintain BUY with target price of S$3.80. 

  • Our target price of S$3.80 is pegged to 12x 2016F PE for its Utilities business. 
  • TPCIL and NCCPP are expected to strongly drive future Utilities earnings growth. However, possible provisions and a potential cash call from its Marine unit could be a drag. 
  • Maintain BUY on valuation grounds. 




Nancy Wei CFA UOB Kay Hian | Foo Zhi Wei UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-29
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.80 Same 3.80


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