(Stocks Discussion) SGX: Sembcorp Industries Limited (SGX: U96)?

Business Profile

Sembcorp has come into the light again with Sembcorp Power in place. Outside of the electricity market they also provide essential energy and water solutions to both industrial and municipal customers. They are also a brand name in urban development in Vietnam, China and Indonesia.

Financials

Income Statement

Despite a 30% increase in revenue, gross profit fell by 26% due to a 38% increase in cost of sales. Profit Before Tax as a result also fell, but was buffered by higher operting income, lower non-operating expense and higher finance income.

Balance Sheet

The company has strong short-term liquidity with a current ratio of close to 5. Morevoer, current assets mainly comprise of cash (75%), which leads to a cash ratio of more than 3 times. The business also seems to have very low leverage with a D/E ratio of 1.35. Due to worsened profitability, Return on Assets, Return on Equity and Interest Coverage had worsened from FY17 to FY18.

Cashflow Statements

Despite reductions in profit, operating cashflows had improved due to stronger working capital conditions. However, in FY18, Sembcorp had made substantial acquisitions of subsidiaries, associates and joint ventures which led to a 12X increase in cashflow from investing activities. Additionally, capital expenditures of PPE increased by 1.5X as well. Cashflow from financing activities was also negative due to redemption of perpetual securities and payment for non-controlling interest acquired in FY17.

Growth Opportunities

Utilities Performance in India

India remains a key growth driver, accounting for 15-20% of earnings of Sembcorp. Utilities earnings achieved grew 23% YOY from improvement in India operations. This expected to continue into 2019 along with the resumption of a plant which had 50% capacity due to technical issues. The power market there is also recovering which can increase tariffs.

Marine Sector Improvement

The marine subsidiary had attained a surprising net profit in 4Q18, which led to the overall net profit for FY18 being better than expected. With improvement capex, this has led to more contract enquiries which may lead to improving financials, although the gestation period for this might be long.

Risks

Competitive Power Market

The opening up of the electricity market had led to a much more competitive environment. The carbon tax could also result in a cost of $15-20m which might be passed on to customers. Profits for this segment had fallen quite a fair bit compared to before in 2013. Find out more about Sembcorp Power here.(http://snip.ly/wl9nuz#https://www.sembcorppower...)

Execution of Strategy in India

With strong growth potential in India, Sembcorp needs to focus on execution to deliver the results it has promised to shareholders. This venture might be more risky, since India is still a relatively new market and strategies applied in Singapore can't be replicated wholesale there.

TL;DR

Sembcorp Ind is currently trading near its 52-week low. Let us take a look Sembcorp, which is a component stock of the Straits Times Index.

Share price

Share price is currently trading at $2.38 as at 4/6/2019. 52-week L/H is $2.36/$3.11.

Share price decreased ex-dividend and due to the high beta of 1.03 (below), which means high correlation to the volatility of the market.

Dividends paid in 2018: 4.00 cents per share, giving a payout ratio of 23.6%.

Constituents of their profit (Left side is profit, and right side is percentage of profit as a whole). As you can see, utilities and urban development accounts for the bulk (or all of the positives, actually) of their net profit. The marine sector is facing challenges which will continue in 2019.

P/E of around 14 means it is quite fairly priced.

At the share price of $2.38, if the dividend per share remains the same, it gives a dividend yield of 1.68%.

1Q2019

Sembcorp 1Q2019 net profit increased 21%.

The Energy business’ net profit increased by 21% to S$85 million in 1Q2019 compared to S$70 million in 1Q2018, mainly driven by improved performance from India and recognition of peak winter availability payments for UK Power Reserve.

Moving forward

• The Energy and Urban businesses continue to underpin the Group’s performance. However, the market environment continues to be challenging in 2019, especially for the offshore and marine sector.
• The Group remains focused on executing strategy, improving performance as well as strengthening its balance sheet, and is on track to deliver on its divestment programme.
• In Singapore, the Open Electricity Market will be extended nationwide in 2019 and will remain challenging with so much competition.
• India utilities business is expected to improve. The long-term outlook for the India power market remains positive, with the current situation of peak surplus to reverse by the 2020 fiscal year.
• Sembcorp Industries disposed entire equity interest in Gallant Venture for S$62m, giving them more working capital. Potentially can put the cash to better use. (read here: https://www.businesstimes.com.sg/companies-markets/sembcorp-industries-disposed-entire-equity-interest-in-gallant-venture-for-s62m)