Sembcorp Industries - CIMB Research 2016-12-05: Watching India and China

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SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Watching India and China

• We incorporate our recent upgrade in SMM rating and raise our target price for SCI to S$3.02, still based on SOP valuation.
• Higher oil price may be good for Utilities Singapore as gas price is benchmarked to HSFO and crude oil price. We could see slight margin expansion in Singapore.
• There are a lot of factors to juggle in India: 
  1. the technical start-up of SGPL first unit, 
  2. rising coal prices, 
  3. PPA for SGPL, and 
  4. bottoming IEX spot prices.
• The successful execution of its 1,320MW Chongqing power plant by 4Q16F is key, to plug the gap of c.S$40m loss in income from Yangcheng coal-fired plant’s expiry.

Singapore gas could see margin expansion on higher oil prices 

• Gas prices are indexed on High-Sulphur Fuel Oil (HSFO) and move in line with oil prices. Fuel costs are generally passed through in SCI’s contracts but there is a small portion of variable margins. 
• We could see slight uptick in Singapore energy (mainly gas) profits in 2017F, benefiting from the high oil price effects. 
• High oil prices could encourage strategic fuel oil sales, which could swing profit upward. 
• SCI made handsome fuel sale gains of c. S$5m-8m in 1Q09, 2Q13 and 3Q14 (disclosed).

Delay in SGPL could work out for the better in the short term 

• The first unit (660MW) of SGPL (1,320MW) has been struggling with patchy dispatch since Nov 2016 and we believe it could still face some technical hiccups. 
• Although management targets for the unit to be up by 2016, the delay could work to SCI’s favour, as start-up losses (c.S$15m) could be pushed to 2017.

Higher coal prices more negative for SGPL than TPCIL 

• We foresee greater risks for SPGL, as 70% of its power are on short-term contracts and must use imported coal. However, the rising IEX spot market could help to ease some pressure. The index has risen from Rs2.39/unit in Aug 2016 to Rs2.93/unit in Nov 2016, due to stronger market demand and possibly, factoring in higher imported coal prices.
• We see lower risk for TPCIL, as its power purchase agreements (PPAs) are backed by domestic coal, with some pass-through mechanism for domestic coal shortfall.

Can Chongqing fill 50% of China’s income? 

• The co-operative joint venture (25%) for the 2,100MW Yangcheng power plant expires in 2016. The plant has been generating c.S$40m p.a. of net profit for the utilities division since its acquisition in 2012. This is c.50% of China’s reported net profit and China made up c.30% of utilities net profit in 9M16. 
• The expected commercial operation date (COD) for the first unit is in 4Q16F. We caution that the group’s China profit may drop in FY17F, given gestation period for Chongqing plant.

Maintain Hold, with higher target price of S$3.02 

• No change to our FY16-18F EPS. SCI utilities is trading at an implied CY17 P/E of 9x, or +1 s.d. above its historical mean of 7x. 
• We would turn positive if a long-term PPA is clinched, securing earnings visibility in India. 
• Our SOP target price is lifted to incorporate our recent rating upgrade in SMM. 
• Failure to obtain a PPA is a key downside risk.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-12-05

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 3.02 Up 2.660