“Our previous forecast was premised on stronger seasonal wind capacity in Sembcorp Green Infra (SGI), stable plant load factor (PLF) in Thermal Powertech Corporation India Limited (TPCIL) as well as lower interest costs in Sembcorp Gayatri Power (SGLP),”says analyst Lim Siew Khee.
These conditions did materialise but SGPL’s 3Q17 losses of $26 million were largely unchanged vs. 2Q17’s $29 million as alternative supplies contracted earlier at lower prices were affected by higher coal prices, says Lim Siew Khee who expects these alternative supplies contracts to start to taper in 4Q17.
The tightening of power supply due to a shortage in coal has resulted in higher Indian Energy Exchange (IEX) spot prices. Outages in some renewable and nuclear plants also helped spot prices rise above Rs4/kwh (8.4 cents/kwh) in Oct.
Still, SGPL could enjoy some spot price increases from 4Q17 as alternative supplies contracts taper. Management said that SPGL is operating at near-cash cost. According to industry sources, SGPL is bidding for a short-term contract to supply 400MW of power to Karnataka. This could be a rerating catalyst, says Lim.
Back in Singapore, there was a $52 million impairment in 3Q17, which comprised $26 million for boilers and $26 million for goodwill from Tractable’s share purchased for Singapore assets in 2003. Sembcorp also sold some boilers, a cooling tower and associated assets in Banyan to Exxon Mobil for US$113 million ($154 million). CIMB expects potential gains will be $54 million on book value of $99 million.
As for the strategic review of SembMarine, Lim says there are not many options. Firstly, privatisation may not extract the best value at current valuations. Secondly, it would be difficult to find a buyer for SembMarine. Finally, dividend-in-specie distribution may be mildly positive as Sembcorp can focus on being a utilities pure play and relinquish $4.4 billion in debts. But this means it will lose out on a potential recovery in oil prices.
“Our EPS adjustments of 9-10% in FY17-19 reflect our recent earnings downgrade of SembMarine and lower profits from India,” says Lim, “Securing the PPA, a clear strategy of asset monetisation as well as being a pure play in utilities could be key rerating catalysts for the stock.”
“Maintain add, revised target price to $3.87,” she adds.
Shares in Sembcorp are down 11 cents at $3.27 or 18.1 times FY17 core earnings.
