Sembcorp Industries - CGS-CIMB Research 2018-06-02: Buying Low-risk, Flexible Mini Power Plants In UK

Sembcorp Industries - CGS-CIMB Research 2018-06-02: Buying Low-risk, Flexible Mini Power Plants In Uk SEMBCORP INDUSTRIES LTD SGX: U96

Sembcorp Industries - Buying Low-risk, Flexible Mini Power Plants In UK

  • We like Sembcorp Industries’ latest acquisition of UK Power Reserve (UKPR), comprising a string of cheap-to-build, quick-to-fire-up mini power plants in the UK.
  • The acquisition cost of £216m (S$385m) represents c.10x FY3/18 P/E and could potentially add 7-9% (c.S$30m-40m) to Sembcorp Industries’ group earnings from FY19.
  • UKPR has 533MW installed across 32 locations, with c.20MW at each plant. 480MW new capacity will be gradually rolled out from Oct 18 to Apr 19 and beyond.
  • Unlike India, we see little risk of teething issues given the size of these modular power plants. These plants are mainly used to curb the intermittency of renewables in winter.
  • The complete shutdown of coal power plants (c.9% of total UK power) by 2025 also creates structural demand for such flexible distributed power. 
  • Maintain ADD on Sembcorp Industries.

High-margin small reciprocating engine power plants

  • Sembcorp Industries is buying UK Power Reserve (UKPR), the largest flexible distributed energy generator in the UK for £216m (S$385m).
  • UK Power Reserve (UKPR) operates a string of reciprocating gas and battery power plants that are in bite-size facilities of c.20MW each across 32 locations in the UK. About 70% of these plants are brand new and recently commissioned. UKPR generated revenue of £80m and EBITDA of £41m (EBITDA margin of 51%) in FY3/18.
  • Underlying core profit for UKPR was S$38m. We believe UKPR could add c.S$30m-40m of net profit to Sembcorp Industries in FY19.

533MW now, 480MW in the pipeline

  • UK Power Reserve (UKPR) currently has 533MW installed capacity, comprising modular natural gas generators with 480MW in the pipeline. 160MW gas generators (across eight sites) will be fully rolled out by Dec 18. 120MW battery power generators (six sites) will start to go live in Dec 18 and be fully rolled out by Apr 19. The remaining 200MW is secured with contract but UKPR is given up to four years to deliver with an option to go live within one year.
  • By 1H19, UKPR would have total capacity of 813MW in operation.

15% on long-term contracts, > 30% high predictability customers

  • The UK operates a combination of wholesale and capacity markets via auction. Upon full rollout, UKPR would have 15% of its power backed by 15-year contracts. 
  • More than 30% of its power is for customers with high predictability, especially during winter peak. The remaining c.40-50% is flexible power for short-term contracts (a few months to one year) and spot. UKPR purchases its gas feedstock on spot.

Low risk vs. other markets

  • We think the deal is relatively lower risk.
    • First, it is cheaper to build at c.500k£/MW vs. the typical US$100m/MW for traditional Combined Cycle Gas Turbine (CCGT) plants.
    • Secondly, because the plants are smaller, teething issues are limited. The gradual rollout of plants with an identical configuration is also easier to manage. The shorter time to start/stop the plants makes it more efficient to run.
    • Finally, the UK market will see the mandated shutdown of all coal power plants by 2025, creating demand for more flexible power.

Asset recycling, maintain ADD and target price of S$3.49

  • The above acquisition is one of the first major steps in recycling utilities assets post Sembcorp Industries’ strategic review in early 2018. The acquisition will be partially funded by debt. While waiting for India to turn around/be listed, this could help to lift utilities’ profits.
  • We make no change to our EPS for now and our Target Price is still based on SOP. 
  • Successful IPO of India and divestment of assets (with substantial gains) could be the key catalysts. Prolonged losses in India operations could be the downside risk.

When the wind does not blow and sun does not shine

  • The intermittence of renewable power creates opportunity for flexible small-scale reciprocating engine power plants. According to various industry data, the demand for such flexible distributed generation rose to 27% of total installed capacity in the UK to 26GW in 2016 from 15% in 2011. The cost to build was in the range of 500k£ to 850k£/MW.
  • The UK’s electricity capacity market usually pays power producers to generate available back-up power at short notice, providing a guaranteed revenue stream on top of the wholesale electricity price. Therefore, mini plants need to be nimble to start/stop on demand. 
  • The average utilization for these plants are about 1,000 hours MW p.a.

LIM Siew Khee CGS-CIMB Research | 2018-06-02
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