SINGAPORE (Oct 5): UOB KayHian is maintaining its “buy” call on Sembcorp Industries (SCI) with a target price of $3.57.
The unchanged rating comes despite spot electricity prices in India reaching a record high of INR 5.1/kWh (10.7 cents/kWh) in 3Q17.
There was even a one 15-minute period where the prices were running as high as INR 9.9/kWh.
This increase in price was attributed to a power supply crunch on higher electricity demand from power distribution companies.
India’s local news reported that available power supply fell in September due to lower hydro generation during the monsoon season and nuclear generators were shut down for maintenance.
While thermal plants stepped up to meet the supply gap, a shortage in fuel supply due to low inventories caused insufficient fuel to meet demands, resulting in the price hike.
Meanwhile, SCI saw robust performance statistics in 3Q17 for its India operations as Thermal Powertech Corporation India Limited (TPCIL) reported plant load factors (PLF) of about 91% -- the strongest quarterly performance ever -- while Sembcorp Gayatri Power Limited (SGPL) posted PLF of around 73%.
Due to maintenance during July, Unit #3 was shut down for 21 days, causing the figure to be lower.
In a Thursday report, analyst Foo Zhi Wei says, “With Sembcorp Green Infra (SGI) in the high wind season, the combination of higher profits at TPCIL and lower losses at SGPL could result in SCI reporting a profit for its India operations in 3Q17.”
In response, Coal India increased its daily coal supply to power producers by 10%, causing spot prices to fall back to INR 3.4/kWh as of end-September.
While this points to the short-term nature of the hike, Foo says there appears to be a case for elevated spot prices to persist as demand growth remains robust, with India’s Central Electricity Authority (CEA) expecting a 2017-22 CAGR of 7.1%.
Reports from market observers stated that new power generation capacity additions are slowing and with some power producers also facing insolvency issues, this caps the total thermal generation capacity in India.
With all these factors combined, the analyst predicts that the spot electricity prices may remain at the current elevated levels may even signal the end of low spot electricity prices.
As at 1.10am, shares in SCI are trading 2 cents lower at $2.94 or 0.9 times 2017 book with a dividend yield of 1.7%.
