Sembcorp Industries (SCI SP) BUY
Price/Tgt: S$3.43 / S$4.69 Mkt Cap: US$4,277m 52-wk avg daily value: US$11.5m 1-Yr Hi/Lo: S$5.22/S$3.00
Announces development of 426MW gas power plant for US$390m in Bangladesh
Analysts: Nancy Wei / Foo Zhiwei Tel: (65) 6590 6628/6626
What's New?
- Sembcorp announces investment of US$390m to develop a 426-MW Build-Own-Operate (BOO) power plant in Sirajganj, Bangladesh
- Sembcorp's stake is 71%, with the remaining 29% taken up by a subsidiary of the Bangladesh Power Development Board (BPDB)
- Sembcorp's proportionate equity investment is US$68m
- Plant will be completed in 2018, and is backed by a 22.5-year power purchase agreement
- Power plant is a combined cycle model, fuelled primarily by natural gas with high speed diesel (HSD) as backup
Our Take
- Based on Sembcorp's equity stake, the deal structure implies a debt-equity ratio of 75:25.
- Project costs appears favorable, coming at US$0.92m/MW, lower than the US$1.1m/MW rule of thumb.
- We estimate a equity IRR of c.18%, based on tariff rates of Tk3.19/kWh for gas power and Tk13.56/kWh for HSD power. We estimate a normalized annual net profit S$15m. Our current net profit forecasts are S$736m, S$748m and S$793m for 2015-2017 respectively.
- A key concern is the availability of gas fuel to the project as Bangladesh's gas production faces a possible decline unless exploration/production is ramped up. The project is best run on gas fuel. While the HSD tariffs compensate for the high cost of generation, it is 2-3 times greater than bulk tariff rates from BPDB, and thus not sustainable.
- We expect earnings to come in 2H18 at the earliest, with full revenue recognition at best in 2019.
- While earnings contributions seems low, the project is a likely a beachhead for future projects in Bangladesh.
Sources:
The Daily Star - http://www.thedailystar.net/business/singapores-sembcorp-build-400mw-power-plant-122398
The Financial Express - http://www.thefinancialexpress-bd.com/2015/08/06/102999
Valuation/ Recommendation
- No changes to our earnings forecast or valuation given the project's completion is in 2018.
- Our current recommendation remains as BUY, with target price of S$4.69.
