Sembcorp Industries - UOB Kay Hian 2018-10-09: The Curious Case Of India’s High Spot Prices

SEMBCORP INDUSTRIES LTD (SGX:U96) | SGinvestors.io SEMBCORP INDUSTRIES LTD SGX:U96

Sembcorp Industries - The Curious Case Of India’s High Spot Prices

  • Spot electricity prices continue to climb on undersupply of thermal coal for power generation. Coal India (CIL) is raising production but current efforts appear to be hindered by weather. Current dynamics may see high spot prices persist longer than expected.
  • Even assuming coal supply reverts to normal (and spot prices fall), India remains on track to break even or return a profit for 2018. No change to earnings forecasts for now.
  • Maintain BUY with an unchanged target price of S$3.41.



WHAT’S NEW


IEX spot prices soar above Rs7.0/kWh.

  • Spot electricity prices from India Electricity Exchange (IEX) continue to stay above the Rs7.0/kWh level, driven in part by a shortage of thermal coal. For 3Q18, prices averaged Rs3.8/kWh (+15% y-o-y, -6% q-o-q).

Insufficient coal supply driving up prices.

  • An expected decline in wind and hydro power generation resulted in a need for replacement supply from thermal plants. However, coal supply was insufficient to meet demand, resulting in the price spike. Coal supply days have fallen from an average of 10-12 days, to a low of 5 days over the past month.

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Monsoon season hindering supply of coal.

  • Despite higher ytd production from Coal India (CIL), reports suggest that production might not be meeting dispatch targets. The monsoon season is also impacting production, on top of hindering transportation of coal to thermal plants. The situation was doubly compounded by thermal plants not building up a sufficient coal inventory in earlier months.

SEIL and SGPL report 3Q18 PLFs of ~92% and ~80% respectively.

  • Based on our own computation of CEA’s daily generation reports, plant load factor (PLF) of Sembcorp Energy India Limited (SEIL) and Sembcorp Gayatri Power Limited (SGPL) stood at 92% (2Q18: 88%) and 80% (2Q18: 91%) respectively in 3Q18.
  • SGPL had a weak July-August PLF, which improved in September on the back of higher spot electricity prices.


STOCK IMPACT


Lower losses for SGPL likely.

  • We are estimating SGPL to report a smaller loss of S$2-3m for 3Q18 (2Q18: core loss of S$3m).
  • Despite the high electricity prices in Sep-18, the plant saw lower PLFs in the first two months of 3Q18 that dragged on performance. It is possible that SGPL could have maximised gains in September that would result in 3Q18 seeing a breakeven or better from SGPL.

Spike in electricity prices may continue on limited coal supply.

  • Despite the Government of India (GOI) requesting CIL to step up production, the market commentary remains mixed as to whether CIL is able to meet targets. As of Sep 18, production remained below levels seen earlier in the year.
  • Inferring from GOI’s directive to thermal plants to import more coal, it appears there are constraints to domestic coal supply. With few plants having port access to import coal, the undersupply situation could persist longer than expected.

India is on track to break even or turn a profit in 2018.

  • Even if spot electricity prices retreat back to Rs3.5/kWh, SGPL remains in a position to make smaller losses or even break-even. In our base case assuming an 85% PLF, spot price of Rs3.5/kWh and contributions from the 250MW 15-year PPA Bangladesh kicking in for 4Q18, SGPL could just break-even. No maintenance shutdowns are planned for 4Q18.
  • Overall, it is very likely that India will break even or even turn a profit in 2018.


EARNINGS REVISION/RISK


No change to earnings estimates for now.

  • We stand pat on our earnings estimates for now. While our estimates for India are likely to see upward revisions, this will likely be tempered by clarity emerging as to what level of provisions (if any) is required for the additional claims relating to its wastewater business.


VALUATION/RECOMMENDATION


Maintain BUY, target price unchanged at S$3.41.

  • The turnaround story in India remains on track. Elevated spot electricity prices will do well to induce more PPAs to be signed. With India recovering, Sembcorp Industries is on track to achieve its double-digit return on equity goals.
  • The non-marine segment is currently trading at an implied 7.1x forward PE, (LT-mean: 8x) and could be lower given the potential upside from India’s earnings.
  • Maintain BUY with an unchanged target price of S$3.41.





Foo Zhiwei UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-10-09
SGX Stock Analyst Report BUY Maintain BUY 3.410 Same 3.410



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