Sembcorp Industries - CGS-CIMB Research 2018-08-21: Exporting Power To Bangladesh

Sembcorp Industries - CGS-CIMB Research 2018-08-21: Exporting Power To Bangladesh SEMBCORP INDUSTRIES LTD SGX:U96

Sembcorp Industries - Exporting Power To Bangladesh

  • Sembcorp Industries’ second power plant, Sembcorp Gayatri Power Limited (SGPL), could see narrower losses in 2H18, thanks to the 15-year 250MW power purchase agreement with Bangladesh.
  • The 250MW represents c.19% of SGPL’s 1,320MW installed capacity. The plant has been in losses due to the lack of power purchase agreement since the inception of operations.
  • Maintain ADD and unchanged Target Price of S$3.49, based on SOP. 
  • Catalysts include the turnaround of SGPL, signing of more PPAs and successful IPO of Indian business.

250MW 15-year PPA with Bangladesh, in a few months’ time

  • Sembcorp Gayatri Power Limited (SGPL) power plant has won a competitive tender to supply 250MW of power to Bangladesh Power Development Board (BPDB) over 15 years. SGPL has received letters of intent (LOI) from BPDB for the power purchase agreement (PPA).
  • The supply of power will start upon completion of procedural requirements and relevant government approvals. We believe this should come in a few months’ time. The power will be transmitted to the Bangladeshi power grid through the Indian national grid.
  • The 250MW represents c.19% of SGPL’s total installed capacity of 1,320MW. The plant has been operating in losses due to the lack of PPA since the commissioning of operations in 2016. It was not until 2Q18 that it reported profit of S$8m (with the help of S$11m cost recovery from a customer), high spot prices (average of Rs4.1/unit) as well as higher plant load factor (PLF) from a hotter season and shutdown of other gencos.

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Higher rates than India PPA

  • For the current 250MW, SGPL could be the lowest bidder, beating other contenders including Adani Power, Hindustan Power, Jaiprakash Power, Meenakshi Energy and Odisha Power. The actual tariff was not disclosed, but we believe it is higher than PPA tender prices in India (c.Rs2-3/unit).
  • In Feb 18, NTPC, the Indian state-run genco, won a PPA from Bangladesh under both short-term and long-term categories, quoting an estimated tariff of Rs3.42/unit.
  • We think the export of power is a good start and expect to see more in the pipeline given the supply shortage in Bangladesh. The country is opening up avenues to import power from India. It currently imports c.700MW of power via a combination of PPA and open market purchase. The media has reported that it is looking to ramp up its power imports to 10,000MW by 2041.

SGPL losses to narrow with this PPA

  • The Bangladesh PPA is much needed to provide some stability for SGPL’s earnings. We currently forecast a loss of S$60m for SGPL in FY18, assuming spot prices weaken in 2H18. The average spot prices in Jul and Aug hovered at Rs3.54/unit (14% lower than 2Q18). If the PPA kicks in sooner, there could be upside to our forecasts. 
  • We believe SGPL is unlikely to stop with one PPA but will continue to seek more in the pipeline to cope with the low tariff/absence of PPA environment in India.

Maintain Add and Target Price of S$3.49

  • We keep our EPS for now. Sembcorp Industries’ stub valuation is cheap at 0.3x CY18 P/BV and its ROE (7%) is recovering as capex tapers in India and operations start to turn around. 
  • We believe the market has also not priced in stronger UK contribution (UKPR). 
  • Key risks include a sudden plunge in spot prices in India and cash call from Sembcorp Marine (SMM).

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-21
SGX Stock Analyst Report ADD Maintain ADD 3.490 Same 3.490