Insulated from rising costs
? Rising feedstock prices may have positive implications for SCI, particularly for
its Singapore power plants that are fuelled by gas and are on cost-plus terms.
? Its India capacity backed by long-term PPAs, is supported by allocated local
coal and runs on a cost passed-through model.
? The remaining capacity is priced on the spot market or IEX, which is up 47%
since Dec 21, mitigating rising imported coal costs.
? Persistent tightness in the energy market could lead to upside for SCI’s
conventional energy profits. Reiterate Add and SOP-based TP of S$2.96.
Singapore power plants to benefit from high crude oil prices
Around 95% of Singapore’s electricity is generated by imported natural gas. Singapore’s
electricity tariff is regulated by the Energy Market Authority (EMA) and is calculated using
the average of daily natural gas prices over the first two-and-a-half-month period in the
preceding quarter. Piped natural gas (PNG) prices are linked to high sulphur fuel oil
(HSFO) while LNG is linked to Brent and Japan/Korea Marker (JKM). Rising prices may
have positive implications for SCI’s Singapore energy segment (gas and power). For its
gas sales, ASPs are pegged to HSFO and on a cost passed-through method. For power
sales on contracts, SCI hedges a portion of its fuel costs up to a year ahead. For power
sales dispatched to the pool, SCI could benefit from better spark spreads with blended fuel
mix optimisation relative to peers as it is a key PNG importer and supplier.
India PPAs insulated from high coal cost from cost passed-through
Currently, 81% of SCI’s India coal plant 1 is backed by purchase power agreements (PPA),
which go up to 2040. From 2Q22, plant 2 will also have 81% of its capacity backed by
PPAs till 2033/2034. If we include other unannounced short-term contracts, 85% of SCI’s
plant 1 and 2 will be backed by long-term and mid-term contracts. PPAs employ costpassed through models. Power sales in the spot market (Indian Energy Exchange) are
driven by market forces which typically reflect the coal cost from spot e-auction of local
coal and imported coal. IEX tariff has risen by 47% since Dec 21 to an average of
Rs5.19/kwhr in Mar 22 on the back of increased demand ahead of summer and competition
buying in anticipation of shortage due to the Russia-Ukraine war.
Upside to our conventional energy earnings forecasts
SCI’s conventional energy (CE) segment, which includes Singapore power, gas and India
coal power, delivered a core profit of S$218m in 2H21 (+18% hoh, +85% yoy). This
excludes S$30m provisions made for remedial obligations in UK. Our calculated core profit
for CE for FY21 was S$407m (+66% yoy). The strong performance was premised on high
HSFO, Uniform Singapore Energy Price (USEP) and IEX prices. Persistent tightness in the
energy market could translate into strong CE earnings in 1H22F. Our forecasts include a
15% yoy fall in FY22F revenue, which we maintain given the uncertain global geopolitical
scene.