Sembcorp Industries – Conventional Energy drive improved operational performance

3 Mar 2022
  • FY21 net profit of $300mn was above our estimates, at 146% of FY21e. The beat came from higher revenue from Conventional Energy, which surpassed our expectations on the back of better spark and dark spreads particularly in 4Q21.
  • 85% of SEIL’s thermal plant capacity now comprises mid- and long- term power purchase agreements (PPAs). We have penciled in a reversal of the losses from its SEIL 2 plant from FY23e.
  • Net gearing declined by more than 20% of our FY21e forecasts. Free cash flow rose 71% YoY as better operating performance drove higher net cash from operating activities, which were used to amortise its loans.
  • We upgrade to ACCUMULATE from NEUTRAL with higher target price of $2.94. We raise FY22e PATMI by 6.8% as we bake in higher profits from Conventional Energy for FY22. Our target price is raised to $2.94 as we roll forward our valuation to 1.2x FY22e P/BV, the average of its peers.

The Positives

+ FY21 net profit of $300mn was above our estimates, at 146% of FY21e. The beat came from higher revenue from Conventional Energy, which surpassed our expectations on the back of better spark and dark spreads particularly in 4Q21. The better spreads arose from stronger commodity price and better demand-supply dynamics. Net profit before exceptional items was 69% higher YoY, lifted by higher contributions from all key revenue segments: Renewables, Integrated Urban Solutions and Conventional Energy. Its coal business in India – Thermal Power Project I (P1) and Thermal Power Project II (P2) – also performed better than expected with higher demand lifting turnover. This segment remained the key contributor to turnover, accounting for 84% of overall revenue.

+ 85% of SEIL’s thermal plant capacity now mid- and long- term PPA. SCI’s subsidiary, SEIL, recently signed two long-term PPAs, bringing 85% of SEIL’s thermal plant capacity (previously 50%) to be secured by mid- and long- term PPA. The first PPA is to supply 625MW of power to Andhra Pradesh state power distribution companies for 12 years. The contract is expected to commence by FY23e. The second PPA is to supply 200MW of power to Bangladesh till May 2033. The contract is expected to commence in 1H22.

We view these developments positively for SCI’s India operations. SEIL has two projects in India, SEIL 1 and SEIL 2, with total gross installed capacities of 1.32GW each. Historically, SEIL 2 has been recording losses since FY16 due mainly to the absence of long-term PPA’s. We believe these contracts will reverse the losses from SEIL 2 from FY23e onwards.

+ Net gearing declined by more than 20% of our FY21e forecast. Free cash flow rose 71% YoY as better operating performance drove higher net cash from operating activities. The repayment of its project finance debt for Sembcorp Energy India and Sembcorp Green Infra drove net gearing lower to 160.8% from 199.8% in the same period last year. This compares favourably with the 184% we initially pencilled in.  

The Negatives

– Major maintenance shutdowns in 2022 for Phu My 3 to impact revenue. The tariffs from the maintenance of its Vietnam power plant will be further reduced as its PPA approaches expiry in 2024.

– FY21 land sales slightly below our forecasts. The Group achieved total land sales of 168 hectares in 2021, below our 180 hectares forecast. Nonetheless, SCI still saw better contribution from the urban business on higher prices achieved for land sales and contribution from the waste and waste-to-resource businesses. Despite the miss, management remains confident in achieving its 2025 target of 500 hectares land sales. 

Outlook

We expect the group to continue with its transition to sustainable solutions and sustainable development. Despite its ambitious growth plans, it will not require any equity fund-raising, relying entirely on internal sources.

The Conventional Energy segment continued to perform well in January this year as global energy markets rose in tandem with commodity prices. For FY22e, we expect this segment to be supported by firmer commodity prices and energy markets.

The Group is on track to achieve 10GW gross installed renewables capacity by 2025. The Group secured 2.9GW of new renewable energy projects across key markets in 2021. Upon completion of the 658MW portfolio acquisition in China in 1H22, the gross renewables capacity installed and under development will reach 6.1GW. The Group is actively seeking deals in India, China and the UK by leveraging on its partnerships and platforms for their acquisitions.

Upgrade to ACCUMULATE from NEUTRAL with higher target price of $2.94

We raise FY22e PATMI by 6.8% as we bake in higher profits from Conventional Energy for FY22. Our target price is raised to $2.94 as we roll forward our valuation to 1.2x FY22e P/BV, the average of its peers (Figure 2).

About the author

Terence Chua
Senior Research Analyst
Phillip Securities Research

Terence specialises in the consumer, conglomerate and industrials sector. He has over five years of experience as an analyst in the buy- and sell-side. As an institutional fund management analyst, he sat on the China-Hong Kong desk. Terence was ranked top 3 for Best Analyst under the small caps and energy category in the Asia Money poll 2018.

He graduated from the Singapore Management University with a major in Finance (Honours), and is the honoured recipient of the CFA scholarship.

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