1H much stronger than expected
Positive profit alert – 1H recurring profit to be materially higher y-o-y. SCI issued a positive profit alert for 1H22, guiding profit to be materially higher y-o-y. We clarified with the company – the reference point is recurring profit of S$252m (pre-exceptional loss of Chongqing plant of S$206m) in 1H21. It appears that SCI could deliver >S$300m profit in 1H22, much better than street expectations of S$250-300m. The strong performance was driven by Conventional Energy segment, especially in Singapore and India.
Singapore spot electricity prices continue to stay high.
Average monthly uniform Singapore energy price (USEP) released by Energy Market Authority (EMA) averaged S$300-350/MWh in 1Q-2Q22. While this moderated ~30% from the historical high of S$437/MWh in 4Q21, it remains elevated relative to the S$50-100/MWh range in the past few years and last peak of ~S$200/MWh when oil price hovered around US$100/bbl in 2011-2014.
India tariff has also surged in 1H2022.
Average market clearing (MCP) price for area S1 (where SCI’s power plants are located) has risen to average of INR6,563/MWh in 1H22, from average of~INR4,000/MWh in 2021.
Both demand and cost push.
The strong tariffs are attributable to higher than usual electricity demand by continued recovery of economies post covid, warmer weather and high gas prices.
Exceptionally high gas prices.
Benchmark JKM LNG prices shot up from ~US$10/mmbtu in Jun-2021 to an unprecedented level of US$50/mmbtu in Dec-2021 due to energy crunch, before moderating to the US$30-40/mmbtu level currently, which remains unusually high.
Earnings revisions.
We have raised our FY22/23F earnings forecasts by 25% and 4% respectively. This is to reflect largely the better performance of conventional energy segment in Singapore and India. Profits are expected to moderate from exceptionally high 1H level as tariff normalises but remains elevated at S$200-250m/quarter.
Preferred defensive and renewable play.
SCI remains our preferred pick as defensive utilities play, where demand is relatively resilient during a recession. The bulk of income is backed by long-term contracts with cost pass-through mechanism, except for Singapore and India with their conventional energy capacity on spot market. Singapore and India operations have benefited from margin expansion since 2H21 and the trend continues into 2022, on the back of higher than usual electricity demand driven by continued recovery of economies post covid and warmer weather. We also favour SCI for its renewable transformation.
Valuation.
SCI is currently trading at 1.3x P/BV, which is undemanding relative to renewable peers’ 1.5-2.0x. Coupled with the improved earnings outlook for the conventional energy segment, we raise our target price to S$3.70, based on a higher 1.6x FY22 PB (from 1.4x previously). We believe the strong earnings recovery and renewable focus will continue to propel share price.
