Utilities may be Sembcorp Industries’ saving grace in 2016

Its pipeline is brimming with overseas commissions.

Sembcorp Industries (SCI) may have taken a massive hit in 2015, but there’s hope for the company yet.

According to a report by Jefferies, the most important takeaway from SCI’s FY15 results is that utilities earnings are on the brink of a rebound in 2016 to 2017 as many of its overseas projects get commissioned.

Though currently chugging on at a small loss, SCI’s power segment should be stable hereon as wholesale SPARK spreads are already at rock bottom and vesting contract percentage has been sustained at 25%. Meanwhile, the steadier cogen steam business as well as water treatment and on-site logistics continue to churn out steady income. 

Further, SCI has a robust commissioning pipeline of projects across India, China and Myanmar, the execution of which should push profits over FY16-18. TPCIL India has displayed steady progress, with over 85% of capacity locked up in long-term PPAs where there is fuel cost pass-through and fixed cost recovery embedded at around Rs2.8 kwh.

In addition, the expectation of merchant power sales generating increased returns leads management to think it can generate a mid-teen IRR on the equity invested in TPCIL. Even with heavy rains at the plant and phase 2 growing pains, equity losses from tpcil narrowed to just $1.5m in 4Q15 from $12m in 3Q15. Jefferies anticipates over $800m of equity invested in India to be a significant earnings driver for SCI over FY16-18.