Can the utilities segment boost Sembcorp from earnings rut?

Its India operations reversed from a $58m loss in FY17 to a profit of $47m in 2018.

The strong performance of Sembcorp's utilities business may speed up the firm's earnings recovery in 2019 after the segment achieved an approximate 23% YoY growth to $321m in FY18, according to a report by DBS Equity Research.

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The strong performance was underpinned by improvement in the firm’s India operations, which reversed from a loss of $58m to a profit of $47m in FY18. India accounted for 15-20% of Sembcorp’s earnings.

“The uptrend is expected to continue into 2019 with a narrower surplus in India, commencement of long-term power-purchase agreement (PPA) for the second plant, and resumption of the first plant’s 50% capacity that was affected by boiler issues,” DBS analyst Pei Hwa Ho said.

The utilities business’ steady growth bucks the firm’s headline earnings after Sembcorp’s Q4 profits sunk 94.9% YoY to $5.93m from $117.31m, whilst its FY18 earnings plunged into the red after recording a loss of $74.13m from a profit of $260.18m in FY17.

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In the case of the first power plant in India which is held under Sembcorp Energy India (SEIL), half of the capacity which was affected by boiler issues since October 2018 should resume operations soon, the report explained. There will also be compensation for loss of income during the partial shutdown period which could be received by end-2019.

Losses at the second power plant in India which is held under Sembcorp Gayatri Power (SGPL) is expected to narrow as the long-term PPA to supply 250MW power to Bangladesh comprising of roughly 19% of capacity commences in end-February. “The second long-term PPA to supply 500MW of power to Andhra Pradesh for 8 years could also kick in soon after regulatory clearance,” Pei noted.

“Besides India, Sembcorp has also made forays into other emerging markets such as Bangladesh, Vietnam and Myanmar, and this should underpin the longer-term growth prospects of its utilities segment beyond 2018,” Pei highlighted. “Long-term PPAs have been secured for both Myanmar’s 230MW gas-fired Myingyan Independent Power Producer (IPP) and Bangladesh’s 427MW gas-fired Sirajganj Unit 4.”

Construction of the plants are on track and expected to commence operations in mid-2019.