SINGAPORE (Oct 9): UOB KayHian is maintaining Sembcorp Industries at “buy” with $3.41 unchanged target given its India operations are on track to break even or turn a profit in 2018.
Even if spot electricity prices retreat back to Rs3.5/kWh, UOB says Sembcorp Gayatri Power Limited (SGPL) remains in a position to make smaller losses or even achieve breakeven.
“Assuming an 85% plant load factor (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,” says analyst Foo Zhi Wei in a Tuesday report, “No maintenance shutdowns are planned for 4Q18. Overall, it is very likely that India will break even or even turn a profit in 2018.”
Spot electricity prices in India continue to climb on undersupply of thermal coal for power generation. Coal India (CIL) is raising production but efforts appear to be hindered by the monsoon season. The situation was doubly compounded by thermal plants not building up a sufficient coal inventory in earlier months.
In 3Q18, 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, based on UOB’s calculations. SGPL had a weak July-August PLF, which improved in September on the back of higher spot electricity prices.
UOB is estimating SGPL to report a smaller loss of $2-3 million for 3Q18 from core loss of $3 million 2Q18. Despite the high electricity prices in Sept, 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.
“We stand pat on our earnings estimates for now,” says Foo, “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.”
Year to date, shares in Sembcorp Industries are down 2.6% at $3.00 or 11.5 times FY20 earnings.
