Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-10-05: Shockingly High Spot Electricity Prices Herald Potential 3Q17 Profit For India

Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-10-05: Shockingly High Spot Electricity Prices Herald Potential 3Q17 Profit For India SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries (SCI SP) - Shockingly High Spot Electricity Prices Herald Potential 3Q17 Profit For India

  • Spot electricity prices in India reached a record high of Rs5.1/kWh in 3Q17 on a conflux of supply factors. 
  • With losses from SGPL likely to shrink by 30-40%, Sembcorp Industries (SCI) could see India report a 3Q17 profit
  • While electricity prices have corrected to c.Rs3.4/kWh, it could remain elevated on structural factors. SGPL is estimated to break even at c.Rs3.5/kWh, and a turnaround in its India operations could happen sooner than expected. 
  • Maintain BUY with a target price of S$3.57.



WHAT’S NEW


Robust utilities performance from India. 

  • Sembcorp Industries (SCI) reported a robust set of performance statistics in 3Q17 for its India operations. 
  • For 3Q17, Thermal Powertech Corporation India Limited (TPCIL) reported its strongest ever quarterly performance, reporting plant load factors (PLF) of c.91%, while Sembcorp Gayatri Power Limited (SGPL) reported a PLF of c.73%. The figure was lower due to maintenance undertaken during the July period, which saw Unit #3 shutdown for a period of 21 days.

IEX spot prices hit a high of Rs5.1/kWh in 3Q17. 

  • Spot electricity prices averaged Rs3.3/kWh (+39% yoy, +15% qoq) in 3Q17. Spot electricity prices rose to a high of Rs5.1/kWh during the quarter, with one 15-minute period running as high as Rs9.9/kWh.
  • The spike was due to a power supply crunch on higher electricity demand from power distribution companies. According to local newsline Financial Express and other news sites, available power supply fell in September on lower hydro generation (due to heavy silt from the monsoon) and nuclear generation (maintenance shutdowns). While thermal plants stepped up to meet the supply gap, a shortage in fuel supply due to low inventories resulted in insufficient fuel to fully meet demand, resulting in the price spike.


STOCK IMPACT


SGPL likely to see losses shrink by 30-40% in 3Q17. 

  • On a net basis, SGPL will recognise a significantly higher electricity tariff in 3Q17, which we estimate at Rs3.3- 3.4/kWh (2Q17: c.Rs3.0/kWh). By tactically shutting down Unit #3 for maintenance, Unit #4 effectively had its generation contracted out at the higher short-term PPA tariff of c.Rs3.5/kWh (spot was < Rs3.0/kWh). 
  • SGPL also capitalised on the price spike in 3Q17 as it ramped up PLF to 90+%. On the back of this, coupled with the effects of reduced finance costs, we expect SGPL’s 3Q17 quarterly core loss to shrink by 30-40% from previous quarters (1Q17: -S$26m, 2Q17: -S$29m).

TPCIL to see only a 5% improvement from higher spot prices. 

  • The impact of higher spot prices is more muted at TPCIL, as it only sells 14% of its power generation on the spot market. Assuming that spot prices do sustain above the Rs3.0/kWh level into 2018, we expect a 4-5% improvement to 2017 earnings at best.

Possible 3Q17 profit for India. 

  • With SGI in the high wind season, the combination of higher profits at TPCIL and lower losses at SGPL could result in SCI reporting a profit for its India operations in 3Q17.

Possible turnaround point for India. 

  • Admittedly, the circumstances for the spike in electricity prices were short-term in nature. Coal India has ramped up daily coal supply to power producers by 10%, and spot prices have fallen back to c.Rs3.4/kWh as of end-September. However, there appears to be a case for elevated spot prices to persist.

Demand growth remains robust, with India’s Central Electricity Authority (CEA) expecting a 2017-22 CAGR of 7.1%. 

  • Market observers note that new power generation capacity additions are slowing, and some existing power producers are currently facing insolvency issues – being unable to purchase fuel – capping total thermal generation capacity in India. 
  • All factors combined, spot electricity prices could remain at the current elevated levels in the near term, and even signal the end of low spot electricity prices. 
  • By our estimates, SGPL requires a spot electricity tariff above Rs3.5/kWh to breakeven in 2018. The turnaround in India could come earlier than expected.


EARNINGS REVISION/RISK


No change in earnings forecasts for 2017-19. 

  • No changes have been made to our 2017-19 earnings forecasts in this note, as we await the 3Q17 results. However, we had earlier this week in our sector piece revised down our earnings forecasts for SCI owing to an earnings downgrade for Sembcorp Marine (SMM). (See report: Shipyard – Singapore - Don’t Hold Your Breath On The Oil Price Rally)
  • As a re-iteration, our revised 2017-19 earnings forecasts for SCI are at S$377m (-1%), S$459m (-5%), S$505m (-6%) respectively.


VALUATION/RECOMMENDATION

  • Maintain BUY with target price unchanged at S$3.57. 
  • Our SOTP target price is based on a blended 1-year forward PE of 10x for the utilities business, and our revised target price of S$1.77 for Sembcorp Marine (SMM)
  • Possible upside catalysts would be an improvement at its India and Singapore operations.





Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-05
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.570 Same 3.570



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