After announcing the potential merger between Sembcorp Marine and Keppel Corporation, Sembcorp Marine has been in the limelight. In this article, let us turn our attention to Sembcorp Industries, the parent company that dumped Sembcorp Marine last year.
This article is an exciting topic.
As you can see from the chart below, ever since the demerger between Sembcorp Industries and Sembcorp Marine, their share prices have diverged to a large extent.
Between September 2020 to this point, Sembcorp Industries’ share price has appreciated 115%, while Sembcorp Marine decreased ny 30%.
So what are the reasons for Sembcorp Industries’ better performance? Should investors start looking at this stock?
In this article, we shall explore Sembcorp Industries and what lies ahead for it.
Sembcorp Industries (SGX:U96) is a leading energy and urban solutions provider with a market capitalisation of $3.8 billion.
Apart from operations in Singapore, Sembcorp Industries has projects spanning China, India, Bangladesh, Vietnam, Myanmar, Oman, UAE and the UK.
Its business is divided into three segments:
The bulk of Sembcorp Industries’ revenue comes from its Conventional Energy segment which contributes 56% of its total revenue in FY2020.
Sembcorp is a pretty established player in this field, with over 9,500 MW of conventional power capacity in markets worldwide, generated from a diversity of fuels, including natural gas and coal.
Its gas business contributes to its Conventional Energy segment, offering gas importation, supply and trading solutions for various industries. As the appointed term liquefied natural gas importer for Singapore, Sembcorp Industries is the largest natural gas supplier here and remains critical to the functioning of our city, where natural gas continues to be the dominant energy source.
A breakdown of this segment:
Capitalising the clean energy trend, Sembcorp has been growing its renewable energy portfolio from as early as 2012. It is now one of the most prominent homegrown renewable energy players globally, with a renewable energy capacity of more than 3,300MW.
Its renewable energy portfolio comprises wind, solar and energy storage in various markets like Singapore, Vietnam, China, India and the UK.
A breakdown of this segment:
The last segment of Sembcorp Industries’ business is its integrated urban solution. The role of this business segment is to ensure the sustainable development of cities, with a focus on environmental concerns.
We can further break this segment down into three sub-segments:
This subsegment undertakes master planning, land preparation and infrastructure development to transform raw land into sustainable urban developments, which comprises of industrial parks as well as business, commercial and residential spaces.
As of today, it has over 14 private sector-led and government-supported projects over 12,000 hectares in emerging markets across Asia. They have a presence in China, Vietnam and Indonesia.
Sembcorp’s water management ranges from industrial wastewater treatment to water reclamation and industrial water supply. In total, its facilities process a total of 8.3 million cubic metres per day (Equivalent to 3,320 Olympic size swimming pools)
Interestingly, Sembcorp is involved in the whole system, allowing it to close the loop and ensure the sustainability of water resources. First up, its supply-side obtains water from Water Treatment, Desalination and Water Reclamation (NEWater). The ‘used’ water is then treated in its facilities which can then be used again.
Their water segment has a presence in Singapore, China, Philippines, Oman, UAE and the UK
Waste & Waste to Resource
Have you seen these trucks driving around Singapore? This is the company that keeps our streets clean!
Sembcorp is a Singapore-based integrated environmental services company specialising in trash management, public cleaning, and recycling. Its solid waste management services include the following:
Some of the wastes collected are also used to harness energy and biomass.
This segment is present in Singapore and the UK:
Their business sounds impressive, but how did they do financially? Let’s find out.
For FY2020, the group recorded a net loss of $997 million compared to a net profit of $247 million in FY2019. This was mainly due to a fair value loss of $970 million from the demerger and a net loss of $184 million from its marine business.
If we exclude the performance of its discontinued business, Sembcorp Industries’ net profit for FY2020 was $157 million, which is still 49% lower than the previous year. The drop can be attributed to lower economic activities and energy prices last year during the pandemic. (Energy demand declined by 2% to 7% in key markets)
In September 2020, Sembcorp Marine was separated from Sembcorp Industries. As such, the figure on the left only includes the operations excluding its marine. On the right-hand side, we have the overall performance, which includes its discontinued operations.
Breaking down its profits into its different segments, we can see that its Energy business contributed $160 million in net profit compared to S$195 million in 2019. Yes, there is a drop by 18% but not more than the overall decline of 49% in Net Profit. This means its energy business is not the main culprit for the losses.
From the diagram below, we can also see that its Urban business* contributed $92 million compared to $117 million the year before. Likewise, this was down 21% but still not as much as the overall decline in net profit.
*Its Urban business mainly involves the sales of lands and transforming them into integrated urban developments comprising industrial parks as well as business, commercial and residential space in Vietnam, China and Indonesia
So, where did the majority of its loss come from?
It is caused by a relatively high amount of Others/Corporate loss of $95 million. To be honest, I do not know what this entails.
The only thing I can find on its report describing Others/Corporate is this:
“The Others / Corporate segment comprises businesses mainly relating to minting, design and construction activities, offshore engineering and others.”Sembcorp Industries FY2020 Financial Report
However, supposing that the past is any indication of the future of this segment, I think moving forward, this segment should return to the range of -$34million to $20 million.
Source of profits
Between its Energy and Urban business, its Energy business makes up roughly two-thirds of the profit.
A further breakdown of its energy segment shows that the group still derives 56% of its segmental profit from gas and thermal power. On the other hand, renewable energy only makes up 15%, which means Sembcorp Industries still has a long way to go to reach its renewable targets.
Let’s now take a look at Sembcorp Industries’ income performance across five years.
From the graph, we can see that its income performance has not been spectacular. In fact, it has remained stagnant (if not decreasing) over the past five years.
*Following the demerger, the performance of its marine business from 1 January 2020 to 11 September 2020 is reported under discontinued operation. As such, the turnover and EBITDA for FY2020 are slightly lower and higher, respectively.
Even after removing its Marine business for the past five years, Sembcorp Industries income performance remains lacklustre.
Turnover has dropped in the last two years while its net profit has remained relatively flat over the years.
As of 31 December 2020, Sembcorp Industries’ cash and cash equivalents stood at $1,009 million.
Given that net cash used in investing activities is a one-off thing, we can safely say that Sembcorp business is sustainable moving forward as it continues to generate positive cash flow.
Sembcorp Industries shareholders’ fund declined to $3,476 million as of 31 December 2020 from $7,879 million. Likewise, it is mainly due to the demerger between Sembcorp Industries and Sembcorp Marine, so it is nothing to be alarmed about.
A similar decline can be seen in its business assets and liabilities.
With an interest coverage of 2.4 times, I would say it is not spectacular but a reasonable amount to cover its debt interest payment.
If you have held Singtel shares, you will understand that the opening of the telecommunications space has resulted in its decline over the years.
Likewise, in 2017, the Electricity Market Authority opened the electricity market to encourage competition and innovation in the power industry. Given that, how much will this impact Sembcorp Industries?
Well, first of we must understand how the electricity market in Singapore works. For a start, we have three stakeholders in the industry:
Power generation companies are power plants that generate electricity. This is where Sembcorp Industries’ main business is.
Next are the Electricity retailers who buy electricity from these power generation companies and sell it to consumers. This is where you have SP Group and also new incumbents as a result of the OEM. Unsurprisingly, Sembcorp is also a retailer and sells electricity from its power plant.
*To note, SP Group still owns and maintain Singapore’s sole power grid. Whenever you buy from a retailer, the power still comes from this grid. In return, SP group charges these retailers fees for using their infrastructures.
In my opinion, this OEM will not have a significant impact on Sembcorp energy business as they are primarily a power generation company than a retailer.
In fact, the opening of the electricity market opens up new business opportunities for Sembcorp Industries as it can now sell its electricity directly to consumers.
According to the International Energy Agency, electricity demand is expected to recover in 2021 as the world starts to open up. This would mean better operating performance for Sembcorp Industries moving forward. A word of caution though, there are still a lot of uncertainties as the pandemic continues to wreak havoc on economies.
Looking ahead, Sembcorp has also unveiled strategic plans to transform its portfolio to greener energy sources. This is in line with the megatrends or decarbonisation, urbanisation and electrification of our world and
Sembcorp hopes to take advantage of this to build a portfolio that is future proof. To achieve this, here are the goals Sembcorp Industries has set for themselves.
It aims to have 70% of its net profit coming from its sustainable solutions portfolio, up from the current 40%.
The group also aim for its renewable energy portfolio to grow at a compounded annual growth rate (CAGR) of 30% and its integrated urban solution portfolio to grow at 10% CAGR by 2025.
It aims to quadruple its gross installed renewable energy capacity to 10GW, up from its current 2.6GW.
It aims to triple its land sales by 2025.
It aims to reduce greenhouse gas emissions intensity from 0.54 tonnes of carbon dioxide equivalent per megawatt-hour (tCO2e/MWh) to 0.40 tCO2e/MWh.
No new coal-fired energy asset investments.
Sembcorp Industries is currently trading with a price to book ratio of 1.1.
At this level, it is still well undervalued if you compared to Veolia, a French transnational company with businesses similar to that of Sembcorp. Compared to Veolia’s P/B of 2.6x, Sembcorp seems to have quite a bit of room to recover.
However, if we were to look at its historical PB, Sembcorp Industries seems to have run up quite a bit ever since the demerger. As such, I am not sure if Sembcorp can still increase from here out.
When evaluating an asset-heavy company like Sembcorp Industries, we should focus more on its P/B ratio than its dividend yield. However, dividend investors may want to consider Sembcorp Industries’ current dividend yield too when deciding to buy or not.
With a dividend of 4 cents at the current price of $2.12 per share, it yields around 1.9%, which is relatively low if you are for a dividend stock.
Sembcorp Industries is in a harsh industry. While it has dominance in Singapore and would not likely go away due to the critical service it provides to Singaporeans, I’m not too fond of its profit margins.
Sembcorp Industries’ margin is too low for my liking. Even if we removed the loss-making marine business, Sembcorp Industries net profit margin for FY2020 was 3%. Taking its pre-pandemic revenue, its net profit (excluding its marine business) is also only 5%.
At the same time, while Sembcorp Industries grows its clean energy portfolio, we have to take note that its traditional energy power, which still makes up a bulk of its profit, would start to decline too. Creative destruction would likely take place where its traditional energy portfolio is replaced by cleaner energy. Rather than growth in its portfolio, we would most likely see a replacement of assets in the coming years. For these reasons, I would not be buying into Sembcorp Industries now.
I understand some of you are holding on to Sembcorp Industries and is wondering what to do with it. Well, if I am a shareholder, this is what I would do going forward:
Lastly, Dr Wealth’s Kopitiam Unker has something to say:
“No matter how good the management is, a bad business will remain as a bad business. Instead of turning the business over, the management will be the one turning bad.”