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CGS-CIMB keeps ‘add’ on Sembcorp with unchanged TP despite UK tariff cap

Chloe Lim
Chloe Lim9/23/2022 01:29 PM GMT+08  • 3 min read
CGS-CIMB keeps ‘add’ on Sembcorp with unchanged TP despite UK tariff cap
CGS-CIMB Research sees Sembcorp as a value pick and one of their Singapore top picks. Photo: Sembcorp Industries
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CGS-CIMB Research analysts Lim Siew Khee and Izabella Tan have kept their “add” rating on Sembcorp Industries with an unchanged target price of $4.78.

This is in light of how, on Sept 21, the UK government rolled out a GBP150 billion ($239 billion) Energy Bill Relief Scheme to provide a discount on wholesale gas and electricity prices for non-domestic customers. This package will last through the winter season, from Oct 1 this year to March 31, 2023, after which further help will be extended to companies in vulnerable industries.

Wholesale prices for electricity will be capped at approximately GBP211/MWh for electricity and GBP75/MWh for gas.

“We understand that the final unit cost and mechanism is still pending the government’s confirmation,” write the analysts.

As of 1HFY2022 ended June, Sembcorp’s UK’s conventional power assets comprised approximately 126MW gas fired plants and 35MW of biomass power. It also has 684MW of flexible generation assets with 70MWh of energy storage through its acquisition of UK Power Reserve (UKPR) in May 2018.

UKPR owns and operates a portfolio of highly flexible distributed energy generation projects across 32 locations in England and Wales, with 533MW in operation and a further 480MW in construction and under development, as at May 2018 when the group first announced its acquisition. This combined portfolio of over 1,000MW comprises small-scale, fast-ramping power generation assets and rapid response batteries.

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Out of this combined portfolio, 553MW of UKPR’s capacity is contracted to the capacity market scheme and Short-term Operating Reserve (STOR) for the provision of reserve energy with Low Carbon Contracts Company of National Grid ESO with a tenure of 24 years from 2010 to 2034.

See also: Sembcorp to acquire UK Power Reserve for $385 mil

Prior to Covid-19, the UK contributed about $21 million of profits per annum (p.a.). In FY2020, it generated $7 million of net profit affected by lower flexible power and reduced triad income.

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For FY2021, the analysts estimate Sembcorp’s UK segment to post a net profit of about $30 million to $40 million or 7% to 8% of the group's profit, on the back of a strong merchant market.

“We note that the cap on electricity prices of GBP211/MWh in October still represents a 21% year-to-date (ytd) increase and 83% y-o-y increase from October 2021,” write Lim and Tan. “This is in tandem with the increase in natural gas prices which have increased 30% ytd and 22% y-o-y.”

The analysts also believe that margin erosion may not be significant for Sembcorp’s UK conventional energy power. Moreover, they also add that the tariff cap will not affect UKPR given its flexible generation nature.

At the same time, Sembcorp’s UK segment is also building a 360MW battery storage system at Wilton International on Teesside, of which 150MW of two-hour duration battery has been contracted over a 15- year period starting from 2023.

All in, Sembcorp’s UK segment targets a total of 420MWh of battery capacity, one of the UK’s largest battery portfolios, allowing Sembcorp to provide rapid response time.

To this end, Lim and Tan see Sembcorp as a value pick and one of their Singapore top picks. At its current share price, Sembcorp is trading at 7.8x FY2023 P/E as compared to regional utilities peers’ 14x FY2023 P/E.

As at 1.21pm, shares in Sembcorp are trading at $3.21 at a FY2022 P/B ratio of 1.28x and dividend yield of 4.13%.

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