Sembcorp braces for 8% profit jump after UK Power Reserve buy

The energy generator plans to grow its battery capacity over 32 locations in the UK.

Sembcorp Industries (Sembcorp) bought the UK Power Reserve (UKPR), the largest flexible distributed energy generator in the UK, for $385m (£216m). DBS Equity Research noted that this strengthens its UK utilities presence, which is in line with its revamped policy to rebalance its energy portfolio towards developed markets.

According to DBS Equity Research analyst Pei Hwa Ho, it will be earnings accretive to Sembcorp immediately in 2018, after adjusting for transaction funding expenses. “On a conservative basis, we are looking for around six-month contribution in 2018 to add around $10m in net profits (3% accretion) and around $30m in full-year net profits in 2019 (8% accretion) but there are upside risks to these estimates in our opinion,” she said.

UKPR’s assets comprise small-scale fast-ramping gas-fired power generation assets and rapid response batteries located across 32 locations in England and Wales. About 533MW is in operation (including 120MW of battery storage assets), whilst 480MW is currently under construction or development, which will come online in phases; all are expected to be running by the end of the first quarter of 2019.

“On top of the 480MW currently under construction, UKPR will be looking to secure more capacity in the UK Capacity Market auctions, as demand for flexible capacity is likely to sustain to provide grid security amidst a shift towards greater reliance on renewables,” Ho added.

UKPR secured 348MW in 2014, 160MW in 2015, 120MW in 2016, and 200MW in the most recent 2018 auctions, of which all 348MW of its 2014 Capacity Market commitments have been brought online well ahead of schedule. Spending for the assets under construction is likely to be in the range of $360-$450m, which will be incurred over 2018 to 2019.

“We understand that roughly 25% of the capex is likely to be internally funded while the rest by debt,” Ho said. “We do not expect this to have a significant impact to Sembcorp’s gearing levels.”

The analyst added the management’s guidance that about 15% of revenue in future will be derived from long-term contracts backed by the government in the capacity market. “Another 30% of revenue is from revenues made during winter peak demand season (which is largely predictable); and the remainder is a mix of spot contracts in the merchant market and some short-term contracts in other ancillary markets,” she said.

Moreover, UKPR does not need to hedge its natural gas prices. Ho commented, “Of the entire power generation asset portfolio (excluding 120MW in battery assets), about 60MW (c.7%) is on standby and running on diesel, with the remainder operating on natural gas. We understand that changes in natural gas prices are generally passed through to energy prices.”