Sembcorp Industries - CGS-CIMB Research 2019-05-29: Patience Will Pay Off In India


Sembcorp Industries - Patience Will Pay Off In India

  • SEMBCORP INDUSTRIES (SGX:U96)’s India operations are seeing better days as SEIL 1 returned to optimal PLF of c.73% in the months of Apr and May vs. 58% in 1Q19.
  • Lower coal cost (-10% since end-Mar) could continue to work in SEIL 2’s favour. Ex-SEMBCORP MARINE (SGX:S51), Sembcorp Industries is trading at 0.4x FY19 P/BV, below -1 s.d. of its mean.
  • Maintain ADD. Sembcorp Industries ranks no.2 on the FSSTI to deliver the highest earnings recovery of 20% and trades below -1 s.d. of its 10-year mean.

SEIL 1 on track to achieve optimal PLF

Stator fault resolved for SEIL 1

  • The 75-day downtime for turbine 1 from Nov 18 to Feb 19 resulted in below-optimal PLF of 52% in 4Q18 and 58% in 1Q19. Management blamed the fault of a stator to be the culprit. To rectify the issue, massive re-assembly work on the turbine was carried out.
  • Sembcorp Industries has performed similar checks on the turbines of SEIL 2 and found no major issues. The recovery from insurance is a bonus but we have conservatively ignored this for the time being.

SEIL 1 on track to normalise profits

  • Based on the PLF in Apr and month-to-date May, we are comforted that SEIL is on track to hit its optimal profitable PLF of above 80%. It was operating at c.79% in Apr and c.68% in May with the past seven days at c.89%. Assuming the steady momentum continues in Jun, we could see SEIL swing into single-digit profits in 2Q19 (1Q19: S$11m loss).
  • Prior to the stator breakdown, it operated at close to c.90% PLF, generating profit of S$13m per quarter. We forecast SEIL 1 to deliver profit of S$35m in FY19.

Can SEIL 2 surprise on the upside?

Newcastle coal lower q-o-q

  • For imported coal, Sembcorp Industries maintains a dynamic coal sourcing strategy, obtaining coal from South Africa and Indonesia. Newcastle coal averaged at US$85/tonne in Apr-May (1Q19: US$97/tonne).
  • On the back of steady q-o-q IEX (Rs3.350/kwh) and PLF of 84%, we expect SGPL to continue to be profitable in 2Q19 (1Q19: S$2m), benefiting from the cost savings in coal as well as short-term contracts (six to nine months) clinched at higher tariffs in 2018 (average spot prices in 2H18) were at Rs4.20/kwh).

We expect S$40m loss for SEIL 2 in FY19F, potential for upside

  • SGPL has been in losses since it commenced operations in 2016, until 1Q19, thanks to lower coal costs. We have assumed narrower losses of S$40m in FY19F (FY18: S$57m) on the back of steady PLF (84%), with the help of additional 250MW PPA to Bangladesh kicking in since Feb 19. There is upside to our earnings if IEX spot prices remain above Rs3/kwh and coal cost trends remain low.

Wind power capacity expended by 86% since 2017

Wind power +27% y-o-y to 1,177MW, hopefully 1,727MW by 3Q19

  • Sembcorp Industries has been expanding its wind capacity since 2016 via
    1. increased stake from 72% to 100% in its wind subsidiary, SGI, and
    2. securing new contracts. Currently, SGI operates 1,177MW of wind power.
  • It secured two contracts in 2017 totaling 500MW (Tamil Nadu and Gujarat) and another 300MW (Gujarat) contract in Feb 18. The first 250MW Tamil Nadu wind project was commissioned in Oct 18. We understand that the two Gujarat power projects of 550MW are scheduled to be completed by 1H19 to capture the high wind season.
  • We forecast core profit for SGI to more than double to S$56m in FY19F. This makes up the majority of our India profit estimate of S$52m in FY19F.

Valuation and recommendation

  • At the current Sembcorp Industries share price, the market has ascribed only 1x FY19F P/BV to Sembcorp Marine in Sembcorp Industries’s valuations, while the stock is trading at 1.3x. At the same time, we think the energy (utilities) business is also being discounted at 0.6x P/BV vs. ROE of 8%.
  • Sembcorp Industries ranks no.2 on the FSSTI with the highest earnings recovery of 20% y-o-y in FY19F, in part due to Sembcorp Marine’s profitability and India’s bottoming out. The stock is trading at a two-year low and -1 s.d. of mean since 2009. We see an opportunity to buy on weakness and keep our Target Price, based on SOP valuations. See attached PDF report for details.
  • Consistent performance from its energy (utilities) business is a key catalyst.
  • Cash call from Sembcorp Marine is a risk.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-05-29
SGX Stock Analyst Report ADD MAINTAIN ADD 3.410 SAME 3.410