Give credit where credit is due
? 2H21 core profit of S$220m (-13% hoh, +46% yoy) was 7% above our forecast, mainly on strong conventional energy prices in UK, SG, and India.
? No impairment loss (but slight gain) is a testament to well executed plans. Future impairment risk is low for India with the recent long-term PPA secured.
? Catalysts: contract wins or investments in new renewable assets. Reiterate Add. Discount gap with peers to narrow on consistent earnings track record.
Will conventional energy be as strong in FY22F?
All segments turned in stronger hoh earnings growth in 2H21 with urban solutions delivering the highest hoh growth of 46% (record land sales in China and higher land prices) and a net profit of S$92m. Conventional energy (CE) exceeded management’s guidance of a weaker 2H21 (plant shutdown), delivering a steady 2% hoh increase in net profit to S$188m. Strong merchant market tariffs (USEP) in Singapore and India (IEX) in 4Q21 resulted in a higher spark spread (Figs 2 and 3). In Singapore, we believe cogen power plant turned profitable in FY21 from stronger ASPs and favourable operating leverage as contracts are generally on cost-plus basis. CE 2H21 net profit would have been higher excluding a S$30m provision for remedial obligations in the UK. The volatility of renewable energy in UK in 4Q21 also resulted in stronger demand for UKPR’s flexible energy, helping CE’s performance. In Feb 22, Singapore’s USEP is down 40% while India’s IEX is down 20% from the peak of 4Q21’s average. We are factoring an average 15% decline in profits for CE in FY22F on conservative grounds.
Turnaround hopes in India
The two recent contracts secured in India (12-year contract of 625MW for Andhra Pradesh state starting 2023 and 1-year contract of 200MW for Bangladesh starting 1H22), coupled with strong market prices have lifted value-in-use for SCI’s coal power plants. We believe this could reduce the need for significant impairment if there is any corporate action (divestment, reduction in stake or spin-off) to meet the group’s decarbonisation target. If IEX remains at current levels (averaged Rs3.80/kwhr YTD), SCI’s coal plant 2 could turn around with the new power purchase agreement (PPA) from Bangladesh. Plant 2 has
recorded losses since FY16, with S$52m losses in FY20.
Renewable plans on track
2H21 renewable profit of S$32m (+33% hoh, +146% yoy) was stronger than our S$25m forecast, mainly due to green credit from India wind, stronger margin from battery storage in UK as well as the seasonally strong winds in India. There was also S$11m development charge incurred during the year for M&A activities in 2H21.
Reiterate Add and TP of S$2.96, implies 10.5x FY23 P/E
We lift our FY22-23F EPS by 0.4-6% on higher conventional energy profits, offset by higher corporate costs (revamped incentives to align with group’s transformation targets). At 9x CY23F P/E, SCI still trades below blended trading band of 14x for Asian peers.