Sembcorp Industries - DBS Research 2018-08-21: Second India Thermal Plant Secures Long Term Power Purchase Agreement

SEMBCORP INDUSTRIES LTD SGX:U96

Sembcorp Industries - Second India Thermal Plant Secures Long Term Power Purchase Agreement

Signed letter of intent (LOI) with Bangladesh Power Development Board to supply 250MW power for 15 years.
Represents c.19% of Sembcorp Industries (SCI)’s second India thermal plant’s capacity; expect positive impact of 3% on bottomline in FY19 when deal is finalised by 4Q18.
Turnaround of India operations a key re-rating catalyst.
Reiterate BUY; Target Price unchanged at S$3.90.

Sembcorp Industries (SCI)’s second India thermal plant – Sembcorp Gayatri Power Limited (SGPL) - has received a letter of intent (LOI) from Bangladesh Power Development Board to supply 250MW of power over a total 15 years.

~ SGinvestors.io ~ Where SG investors share

The contracted capacity represents c.19% of SGPL’s 1,320MW design capacity, which currently runs on short term power contracts.
Securing this long-term Power Purchase Agreement (PPA), although representing only a portion of the plant’s capacity, is expected to narrow Sembcorp Gayatri Power Limited (SGPL)’s losses. SGPL has been operating at merely cash breakeven level most of the time since commencement, and recording net losses of > S$20m a quarter, except for 2Q18 that saw losses narrowed to S$3m.
We understand the tariff structure comprises a cost escalation component, which allows partial cost pass through, and expected to help profitability of the plant. We will have more clarity upon commencement of the PPA following completion of procedural requirements and government approvals, hopefully by 4Q18.
Our back of the envelope calculation, assuming SGPL’s long term PPA will contribute marginal profit, suggests SGPL’s expected losses could reduce by c.S$3m a quarter, representing ~3% of the group’s bottomline in FY19. We yet to reflect the Bangladesh PPA in our forecasts.

We see value emeging for Sembcorp Industries with the turnaround of India operations (accounts for ~15% of NTA) which is a key price catalyst.
Reiterate BUY and Target Price S$3.90.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2018-08-21

SGX Stock Analyst Report BUY Maintain BUY 3.900 Same 3.900