CGS-CIMB analyst Lim Siew Khee and Izabella Tan have maintained their “add” call and sharply increased their target price on Sembcorp Industries from $2.96 to $3.66.
In a June 20 note, the analysts say that with six months of strong visibility of merchant market power prices in India and Singapore, they raise their profit expectations for Sembcorp's conventional energy segment.
They note that tariffs for power on the Indian Energy Exchange (IEX) rose to a new yearly average peak of 6.68 rupees ($0.12) per kilowatt hour (kWh) ytd, about 29% above the previous peak of 5.19 rupees per kWh in 2014.
This is due to an earlier-than-expected and much hotter summer vs. other years as well as higher coal prices.
“With the allocation of local coal, which is about 200% cheaper than international coal as of April 2022, we expect Sembcorp to benefit from the strong e-auction prices,” Lim and Tan say.
The analysts also highlight the point that 85% of Sembcorp’s India plant 1 and plant 2 are underpinned by long-term and mid-term contracts, of which 81% of plant 1 is backed by purchase power agreements (PPAs) till 2040, and 81% of plant 2 is backed by PPAs till 2033/2034.
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As such, high tariff prices and a stable plant load factor (PLF) of above 70% since February 2022 for plant 2 may see it turn profitable in FY2022, assuming the plant load factor (PLF) remains at this level for the rest of 2022.
This was earlier than the analysts’ previous expectations of the plant turning profitable in FY2023 ending Dec 2023.
In Singapore, the Uniform Singapore Energy Price (USEP) also hitnew highs, with prices climbing to an average of $327 per megawatt hour (MWh) in Jan to June 2022.
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This surpassed the $295 per MWh average from July to Dec 2022 and the $95 per MWh average in Jan to June 2021. This represents a 11% increase h-o-h and a 242% increase y-o-y.
Singapore’s Energy Markets Authority (EMA) expects high gas prices to persist with the protracted conflict in Ukraine as well as the seasonal increase in energy demand, with the analysts saying, “we expect spark spread for Sembcorp’s Singapore power to surge on the back of this.”
Spark spread refers to the difference between the wholesale market price of electricity and its cost of production using natural gas.
They expect “a full year contribution of strong profits” from Sembcorp Cogen, Sembcorp’s power arm in FY2022, noting that Sembcorp Cogen posted a turnaround in FY2021 with a profit of $31.3 million, vs a $167 million loss in FY2020.
This assessment from Lim and Tan was a reversal from previous estimates, with the analysts assuming a 15% y-o-y decrease in FY2022 revenue and net profit for the conventional energy (CE) segment as FY2021 was an abnormal peak year.
However, they now raise our FY2022 revenue and net profit for CE by 27%, on consistently high IEX tariffs and USEP prices.
“We also up our profit for renewable energy (RE) by 10% to reflect the contribution of newly acquired associate SDIC from Feb 2022.”
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SDIC generated net profit of RMB$492 million ($103 million) of net profit in FY2021, up 42% yoy.
According to SDIC’s annual report, the reason for the strong performance was due to some operations reaching full-year contributions and the business in Xinjiang enjoying good wind resources in 2021 and increases in power generation.
They estimate full-year contributions of $18 million from SDIC in FY2022, net of interest costs and assume a 10% lower profit on normalisation.
Earnings per share estimates for FY2022 to FY2024 also rise by 7%-19%, and the analysts say that some catalysts for Sembcorp are a stronger-than-expected merchant market and decarbonisation of coal-powered plants in India, while some risks for the company are unplanned shutdowns and impairments.
As at 12.16pm, shares of Sembcorp were trading at $2.89, with a FY2022 P/B ratio of 1.17 and dividend yield of 3.09%.
