Sembcorp Industries Limited (SGX:U96) ([stock_quote symbol=”SGX:U96″ show=”name” nolink=”1″ class=”1″]) is a Singapore-listed conglomerate with a market capitalization of S$5.4 Billion (May 2017). The company that is also one of the thirty companies that make up the Straits Times Index (STI).

SembCorp Industries (SCI) has seen some rough times in the past few years. This was mainly due to the decline in its offshore and marine business as the oil and gas sector is suffering. It has seen its share price fallen from about S$5.40 per share to the current S$3.20 per share. However, does that mean that opportunities are lurking within SembCorp Industries for investors now? Check out the top 7 things you need to know about SembCorp Industries before making a decision.

1. Stock Information

1

TICKER SYMBOL: SGX:U96

MARKET CAP: S$5.4 billion (May 2017)

SECTOR: Conglomerate

INDUSTRY: Conglomerate

2. The Business

The company has three business divisions – Utilities (Energy, Water, Waste Management), Marine & Offshore, (through its 61% ownership of Sembcorp Marine (SGX:S51) ([stock_quote symbol=”SGX:S51″ show=”name” nolink=”1″ class=”1″])) and Urban Development.

The utility business is mainly focused on providing energy and water solutions with a presence in Singapore, India, China, UK and some new emerging countries. This segment contributed S$4.11 billion in the fiscal year 2016 , which was 52% of total revenue.

The marine division, managed through its listed subsidiary, SembCorp Marine, is involved in many aspects of the marine business such as rig building, shipbuilding, and repair and offshore platforms. This segment contributed S$3.54 billion which was 44% of total revenue.

Urban development which is involved in development of industrial parks contributed S$11.2 million while other businesses contributed S$245 million in revenue.

Overall for the fiscal year ended 2016, SCI had revenue of S$7.9 billion and profit of S$394.9 million. Over the past five years’ revenue has grown at a negative clip of 2.66% per annum and profit followed suit clocking in at a negative 13.37% annual decline.

However, there are some signs of new growth opportunities ahead for the company.

3. Key Opportunities

  • Expansion into other markets

Sembcorp Industries has recently made a huge push into the Indian energy market. It now has a total capacity of 2640 MW of thermal energy plants and 900 plus MW of renewable energy. This market was non-existent for the company back in 2006 but is now one of the biggest markets for SembCorp Industries. It recently also signed a new deal to develop a further 250MW of wind energy plant in India which will further cement its place in the huge market.

Other than India, SCI has been signing many deals over the past few years to expand to other emerging countries. One of these was for the development of a 426 megawatt (MW) power plant in Bangladesh. The construction of this asset is expected to be completed in 2018. In addition, Sembcorp also signed a 22.5-year power purchase agreement (PPA) with the Bangladesh Power Development Board. This means that after the asset is completed, it will provide the company with relatively stable revenue.

In December 2015, Sembcorp Industries also signed another two power deals. The first was for the development of a 225 MW gas fired power plant in Myanmar. This will be completed in 2018 as well and has a 22 year PPA which helps to ensure stable revenue for the company. The second deal was an agreement to form a joint venture for a 1620 MW coal power plant in China. 300 MW of that is already operational and the remaining 1320 MW capacity will be completed by 2017.

  • Revival of the Marine business

Since 2014, SCI’s subsidiary Sembcorp Marine has been having a tough time. The oil crisis hit its business directly. Despite all these tough times, it seems like the business might be finally turning a corner since the end of 2016. This is further supported by the rise in oil prices which is helping many troubled oil companies to find new businesses again.

Also, Sembcorp Maine expanded its business expertise by focusing on building up its LNG business. The LNG sector is fast-growing and seems to have a good future. They did this by acquiring a majority stake in Gravifloat, which designs and holds patents for a suite of marine LNG terminal solutions. These solutions are fixed near-shore, re-deployable, modular and scalable. Apart from that, Sembcorp Marine has undertaken LNG repair projects. These two initiatives are helping it book a place in the LNG industry as an important player.

4. Key Risks

  • Increasing competition in the Singapore power market.

Singapore was the biggest profit contributor for SCI’s energy business back in 2013 and its one segment what has gone just downhill since then. In 2013, SCI’s Singapore energy business contributed S$179.4 million in profits for the company. That is come down to just S$59.1 million in 2016. There are two reasons for the drop, increasing competition from new power plants which is pushing up over-capacity issues. This has contributed to the drop in energy prices in Singapore.

  • Execution of Indian power plants.

While I mentioned its Indian power plants in a key opportunity’s segment, there are also execution risks for SCI in this market. One of the issues is that for the 1320MW of thermal power plant in India, SCI has not been able to secure a PPA. What this means is that SCI is dependent on the cash market to take up the energy it is producing. This makes it quite a risky venture as the company is selling a product with no fixed price to fall back on and no fixed take up rate. Essentially, SembCorp Industries is building a product before it has any customer for it.

5. Valuation

SembCorp Industries currently trades at a price to earnings (P/B) ratio of 15.4 and has a dividend yield of 2.6%. The P/E ratio is higher than its five-year average of 11.2 while its dividend yield is lower than its five-year average of 3.8%.

6. Investor Relations

Investor Relation Material:

For Investor Enquiries
investorrelations@sembcorp.com

M&C Services Pte Ltd

138 Robinson Road #17-00
The Corporate House
Singapore 068906

7. Top Shareholders (2nd August 2016)

  • Temasek Holdings –  48.82%

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Ketz’s personal capacity. It does not in any way represent those of his employer and other related entities. Ketz does not own any companies mentioned.

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