For watt it’s worth
? With 6 months of strong visibility of merchant market power prices in India
and Singapore, we raise our profit expectations for conventional energy (CE).
? We also raise our FY22F-23F profits for renewable segment to include profit
from new associate, SDIC that started to contribute from Feb 22.
? Accordingly, we lift our FY22F-24F EPS by 7-19%. We reiterate our Add call
with a higher SOP-based TP of S$3.66 (implied 12.7x FY23F P/E).
? Catalysts: stronger-than-expected merchant market and decarbonisation of
coal-powered plants in India. Risks: unplanned shutdowns and impairments.
9-year high tariffs for SCI’s Indian coal
Tariffs for power on the Indian Energy Exchange (IEX) rose to a new yearly average peak
of 6.68 Rs/kWh YTD, c.29% above the previous peak of 5.19 Rs/kWh in 2014. This is
due to an earlier-than-expected and a much hotter summer vs. other years as well as
higher coal prices. With the allocation of local coal, which is c.200% cheaper than
international coal as Apr-22, we expect SCI to benefit from the strong e-auction prices.
Recall that 85% of SCI’s India plant 1 and plant 2 are underpinned by long-term and midterm 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. The high tariff prices and
stable PLF above 70% since Feb 22 for plant 2 (assuming this remains in the rest of
2022) may see plant 2 turn profitable in FY22 (vs. previously expected in FY23F with
long-term PPA kicking in).
USEP prices are also hitting new highs
SCI’s conventional energy segment also includes Singapore power and gas. Like IEX
prices, Uniform Singapore Energy Price (USEP) prices climbed to an average of
S$327/MWh in Jan-Jun 22, surpassing the S$295/MWh average in Jul-Dec 22 and
S$95/MWh average in Jan-Jun 22 (+11% hoh; +242% yoy). 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. We expect spark spread for SCI’s Singapore
power to surge on the back of this. Note that Sembcorp Cogen (SCI’s power arm) posted
a turnaround in FY21 with a profit of S$31.3m vs. S$167m losses in FY20. This reflects
the strong USEP that started to rise significantly from Jul 21. Therefore, we expect a full
year contribution of strong profits from Cogen in FY22.
EPS up 7-19% for FY22-24F; SOP-based TP raised to S$3.66
We previously assumed 15% yoy decreases in FY22F revenue and net profit for CE as
FY21 was an abnormal peak year. However, we now raise our FY22F 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 22. This is offset by lower growth for integrated urban solutions
on weaker land sales from China. Our TP is on 15x FY23F EV/EBITDA for RE, 1x FY22F
BV for integrated urban solutions, 8x FY23F EV/EBITDA for CE and 1x BV for others.