Sembcorp Industries (SCI SP) - UOB Kay Hian 2018-04-04: India Rising ~ 1Q18 PLFs Show Steady Performance At About 80%

Sembcorp Industries (SCI SP) - UOB Kay Hian 2018-04-04: India Rising ~ 1Q18 PLFs Show Steady Performance At About 80% SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries (SCI SP) - India Rising ~ 1Q18 PLFs Show Steady Performance At About 80%

  • India reported steady plant load factors (PLF) of ~80% for 1Q18. Exceptionally strong performance from Sembcorp Gayatri Power Limited (SGPL) will likely drive an earnings improvement relative to 4Q17. 
  • Rising spot electricity prices are encouraging a higher likelihood of power purchase agreements (PPA) issuances, and higher tariffs locked in could drive an earnings improvement for India. However, the earliest window of improvement appears to be Jun 18 onwards. No change to estimates.
  • Maintain HOLD with unchanged target price of S$3.28. Entry price: S$3.00.



WHAT’S NEW


SEIL and SGPL report steady PLF of ~80% for 1Q18. 

  • Sembcorp’s Industries (SCI) two India power plants, Sembcorp Energy India Limited (SEIL, ex TPCIL) and Sembcorp Gayatri Power Limited (SGPL), reported 1Q18 estimated plant load factors (PLF) of 79.4% (1Q17: 83%) and 83.3% (1Q17: 60%) respectively.

Weaker SEIL PLF attributed to soft performance in Feb 18. 

  • An unplanned outage of both generation units, lasting a period of 6-7 days each resulted in PLF coming in below 70% in Feb 18. Coupled with the seasonally weak electricity demand in Jan 18, overall PLF fell 3.6ppt on a y-o-y basis.

Strong performance from SGPL despite three outage incidents. 

  • Despite having three outage incidents lasting 13 days during the quarter, SGPL reported exceedingly strong PLF > 95% during March. This is likely due to the start of a ST PPA with Tamil Nadu that pushed SGPL’s generation capacity to its full limit.

IEX spot prices inch higher above the Rs3.5/kWh mark. 

  • Spot electricity prices continue to inch higher, with average spot prices at Rs3.5/kWh for 1Q18 (+19.8% y-o-y, - 1.3% q-o-q). Prices started picking up especially in March, averaging Rs4.1/kWh before falling back to the present weekly average of Rs3.7/kWh.


STOCK IMPACT


India lining up to be an improvement in 1Q18. 

  • A smaller loss than 4Q17 levels is expected for 1Q18, given the decent PLF performance. A sequential improvement from the loss in 4Q17 is to be expected, led by smaller losses from SGPL on the higher PLF performance. 
  • However, the overall segment will remain a loss given that Sembcorp Green Infra (SGI) is in low wind season, and the profits from SEIL are unable to fully offset losses from both (SGI and SGPL).

Rising spot electricity prices raises potential for PPA awards. 

  • DISCOMS were previously less inclined to award long-term power purchase agreements (PPAs) when prices were low as they could purchase electricity from the spot market. With prices now rising, DISCOMS are now understood to be keen to lock in prices. 
  • ST (short term) PPAs and even medium-term (1-7 yrs) PPAs inquiries are returning, and at levels higher than last year. Any new PPA award will likely be at a higher tariff price than the existing PPAs Sembcorp Industries has entered into. 

Earnings improvement earliest from Jun 18 onwards. 

  • India’s underperformance mainly stems from SGPL’s losses, caused by the low tariff ST PPAs it is currently executing. These were mostly contracted in 2H17 when spot prices were low. 
  • To benefit from the higher tariffs of new PPAs, SGPL will have to first complete the PPA contracts it has entered. The earliest window for this to happen seems to be after Jun 18, when SGPL’s current contracted capacity falls to ~38%. Assuming spot electricity prices remain high, we could potentially see an improvement in India’s earnings.



EARNINGS REVISION/RISK


No change in earnings forecasts for 2018-20. 

  • We have not made any revisions to our earnings for Sembcorp Industries’s India power plants for now. However, should a scenario where Sembcorp Industries enters into a substantial number of ST/MT PPAs at higher tariffs, our earnings forecast for SGPL could see losses halve. India could potentially reach breakeven on this. 
  • We will revisit this when we have greater visibility of such an outcome materialising.


VALUATION/RECOMMENDATION


Sensitivity analysis shows upside to valuation for India. 

  • Our PE valuation for Sembcorp Industries theoretically excludes India owing to the losses incurred. However, should we incorporate the book value of the business (as reported in the IPO prospectus), our fair value will rise to as much as S$4.08 assuming 1.0x P/B for the India business.

Maintain HOLD, with unchanged target price of S$3.28. 

  • Our SOTP target price of S$3.28 remains unchanged, pegged to 2019 valuations. 
  • The utilities segment is priced at an implied 9.1x forward PE, while Sembcorp Marine is valued at S$1.90, based on 1.6x 2019F P/B.







Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-04
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 3.280 Same 3.280



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