Weakening power spreads in Singapore threaten Sembcorp’s financials

It’s time to put hopes in foreign projects.

Power spreads in Singapore continue to weaken and are expected to remain weak this year, though the financial impact was a mere 4% lower YoY in net profit from Singapore utilities.

According to a report by OSK-DMG, despite this, strong potential is seen in Sembcorp’s pipeline of infrastructure assets coming online in FY15-16.

Its recent acquisition, Green Infra Ltd, was also revealed to be profitable and could present an earnings surprise. A long-Sembcorp, short-SembMarine trade may generate positive alpha.

In India, the shortage of power generation remains a key concern – new capacity could be absorbed and at relatively high margins. After a slight delay from 4Q14, Unit 1 of Sembcorp’s new Indian power plant will be completed in 1Q15, and the equal-sized Unit 2 later this year.

Sembcorp paid SGD232m for a 60% stake in Green Infra Ltd, which owns a portfolio of wind and solar power plants across India. 516 megawatts (MW) are in operation, and another 184MW will be completed by FY15. Furthermore, this entity was revealed to be profitable. The company stated that “Green Infra has identified a strong pipeline of new projects to underpin its future growth”, which indicates to us that Sembcorp’s mid-term growth direction has a strong focus in high-margin operations in India.