Sembcorp Industries (SCI SP) - UOB Kay Hian 2016-07-05: India's Power Performance Starting To Look Spotty

Sembcorp Industries (SCI SP) - UOB Kay Hian 2016-07-05: India’s Power Performance Starting To Look Spotty SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries (SCI SP) - India’s Power Performance Starting To Look Spotty

  • Based on reports from India’s Ministry of Power, SCI’s TPCIL plant performed largely within expectations albeit with several hiccups. 
  • Despite undergoing extended maintenance, Unit #2 continues to have issues, with the latest outage occurring last Tuesday (28 June). 
  • Furthermore, spot electricity prices have once again plunged to 1Q16 lows. We slash India’s earnings by 42-46% and lower our target price to S$3.35. 
  • Maintain BUY on valuation grounds.



WHAT’S NEW


TPCIL’s 2Q16 performance largely within expectations. 

  • For 2Q16, Thermal Powertech Corporation India (TPCIL) reported an average plant load factor (PLF) of 69%, largely within expectations. The reported PLFs for April-June were 54%, 66% and 88% respectively. The low PLF in the first two months was due to the shutdown of Unit #2 for repair and maintenance owing to an electrical fault. This was highlighted during Sembcorp Industries’ (SCI) 1Q16 results call.

Unit #2 continues to have performance issues after maintenance. 

  • Post maintenance and successful restart of Unit #2 on 19 May 16, performance has been commendable but still suffered from hiccups. The unit suffered an outage for two hours on 25 May due to a boiler problem, which lowered PLF to 86% from the usual 90+%. 
  • More recently on 28 June, Unit 2 suffered another shutdown owing to pump problems. PLF crashed to 6% as a result. At the time of this report, data was only available up to 29 June, which showed the unit still down at 0% PLF. An estimate of the unit’s restart was not provided.

Saved by second PPA. 

  • TPCIL’s second power purchase agreement (PPA) with Telangana became effective on 1 Apr 16 as guided by management. This proved a saving grace as spot rates plunged by 33% after April. 
  • Recall that TPCIL only broke even in 1Q16 owing to low electricity prices (on top of numerous outages) in the first two months. This was attributed to Unit #2 having sold a large portion of its capacity on the spot market. 
  • With the second PPA, TPCIL locked in prices at a higher rate, reducing its overall exposure to the lower spot electricity prices.

Remaining 14% of capacity currently sold on spot. 

  • With two PPAs in place, 86% of TPCIL’s capacity has been contracted on long-term rates. The remaining 14% are currently sold at spot prices, which have fallen significantly since last year. 
  • Earnings will likely be lower as a result. SCI is currently exploring short-term contracts to mitigate some of the business risk associated with lower electricity prices.

NCCPP remains uncommissioned. 

  • As of now, both units for NCC Power Projects (NCCPP) remain un-commissioned. We have assumed Unit #1 will start by 3Q16 and Unit #2 by 4Q16.


STOCK IMPACT


Looking to be a year of teething issues. 

  • Judging from the reported PLF for TPCIL and the continued low electricity prices, SCI’s utilities earnings in India are looking less rosy. With weaker-than expected-earnings from TPCIL and losses likely from NCCPP in its starting year, SCI’s 2016 earnings are starting to look lacklustre.


EARNINGS REVISION/RISK


Slashing India’s earnings by 42-46%. 

  • We slash our 2016-18 earnings forecasts for SCI’s India operations by 42-46%. Our previous estimates had assumed a premium in spot electricity prices in India at Rs4.5/kWh. With that premium no longer holding, we have reduced it to the rolling 12-month average of Rs3.5/kWh. 
  • Additionally, the recent 6% price hike by Coal India has raised fuel costs, reducing overall profitability. India is now expected to report net profits of S$27m for 2016, S$78m for 2017 and S$92m for 2018. This compares to our previous estimates of S$49m, S$144m and S$158m respectively.

Overall 4-11% reduction in net profit. 

  • The effect of our earnings cut results in our SCI’s net profit estimates declining from S$548m to S$529m (-3.5%) for 2016, and to S$522m (-11%) for 2017 and S$591m (-9%) for 2018.


VALUATION/RECOMMENDATION


Maintain BUY but with a lower target price of S$3.35. 

  • We lower our target price from S$3.60 to S$3.35, based on SOTP valuation. 
  • Our valuation for the utilities business is based on the sector PE for each business geography as it reflects the inherent risks. The utilities business is thus valued at an implied 9.6x 2017F PE. 
  • The key driving factor for our lower target price stems from weaker earnings from India. 
  • Given the 15% upside from current share price, we maintain BUY on valuation grounds.




Nancy Wei CFA UOB Kay Hian | Foo Zhi Wei UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-05
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.35 Down 3.60


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