Sembcorp Industries ("SCI") had decided to part ways with its shipbuilding subsidiary, Sembcorp Marine. You can find the official announcement [here].
I used to be a SCI shareholder. I was attracted to the relatively defensive and geographically diversified revenue portfolio.
However, I sold all of my SCI shares in April 2019 after the Board opted to cut the dividend. Back then, the conglomerate was still making a reasonable 17 cents EPS, so I was disappointed with the Board's decision to distribute only 4 cents of annual dividend.
On hindsight, I was lucky to have gotten out at that time. SCI stock price had sunk 25 percent since then.
With the loss-making SCM going out of the picture, I received inquiries coincidentally from both my friend and my spouse on whether SCI is worth investing now.
I hadn't been keeping track of SCI developments, so I decided to take a second look. What I wanted to know is whether SCI's revenue portfolio - excluding SCM's contribution - is still as resilient and positioned for growth.
SCI's businesses can be broadly classified into three categories:
(a) Energy generation and waste management ("Energy");
(b) Shipbuilding and repair ("Marine"); and
(c) Land and infrastructure development ("Urban").
Of the three categories, the main revenue drivers are Energy (64 percent in FY2019) and Marine (30 percent). Urban forms a tiny 0.1 percent of the turnover and the remaining is classified as "Others" (I presume these are revenue from assets held for sale).
(a) Energy
The Energy division is involved in electricity generation from thermal power (both coal and gas-fired stations), import and supply of natural gas in Singapore, industrial wastewater treatment, renewables and retail power sales. SCI's main power assets are distributed across Singapore, China, India, the United Kingdom and the rest of Southeast Asia.
With the recent focus on climate action, SCI has repositioned itself as a leading producer of green energy. It owns wind farms in both China and India, solar farms in India and Singapore and a battery storage system in the UK. Renewable energy now forms 22 percent of the total generation capacity. (For context, renewable energy was 14 percent of SCI's total generation capacity five years ago.)
SCI is also involved in industrial wastewater treatment and water reclamation, with facilities situated on Jurong Island, Singapore and in Zhangjiagang, China.
Lastly, SCI operates waste collection service in Singapore via its subsidiary SembWaste (you might have seen a SCI dump truck in your neighbourhood). In February 2020, SembWaste received approval by the Competition and Consumer Commission of Singapore to go ahead with its acquisition of Veolia ES Singapore, another local waste collection company [announcement].
Graph 1 below charts the turnover and operating profit margin of SCI's Energy division over the past five years.
Revenue contribution from Energy has increased significantly over the years. However, the operating profit margin has declined to between 11 and 12 percent. While FY2019 EBITDA was up 17% year-on-year ("y/y") to S$1,309m, net profit dropped 38% y/y to S$195m.
Last year, SCI added new power generation capacity in Sirajganj, Bangladesh and Myingyan, Myammar. These assets should contribute to the turnover in the latest fiscal year.
While the company earned a net asset divestment gain of S$86m in FY2019, it incurred a whopping S$245m in impairment losses. The bulk of it (S$181m) was due to the markdown on SCI's United Kingdom Power Reserve (UKPR) assets. A confluence of reduced consumer demand (due to milder winters) and higher supply (from a delay in retirement of coal-fired power stations) resulted in tighter competition and lower margins, making the investment less valuable than projected.
Additionally, SCI booked an impairment loss of S$64m on its Chilean water asset, currently on sale to Spanish engineering group SACYR SA. It also recorded a S$23m charge in Jiangsu, China, where the company deemed its current water assets will not be able to meet China's more stringent effluent discharge standards.
While SCI did not provide a breakdown of turnover and profit by country, it explained the revenue decline was attributed to lower gas sales and planned maintenance shutdown of power assets in Singapore. One thermal power unit was also shut down in India in 1Q 2019 due to a stator fault, and there was the absence of contribution from South Africa's municipal water operations post divestment.
Notable local events include SCI joining the foray into Singapore's Open Electricity Market under the Sembcorp Power brand and the acquisition of Veolia ES Singapore. SCI also recently signed an agreement with Singapore's PUB to build Singapore’s largest floating solar farm on the Tengeh Reservoir [announcement].
My observations:
With the demerger of SCM, the Energy division will become the main pillar of SCI's revenue and income. FY2019 EPS from Energy was 10.9 Singapore cents (down 38% y/y). ROA was 1.51% and SCI quoted a ROE of 5.3% (down 36% y/y).
SCI operates in the heavily regulated space of utilities and waste management. These industries require significant capital expenditures upfront and the actual return is only known a few years later. Segmental liabilities form 75 percent of assets. While turnover is consistent and recurring, outsized profits are rare and unlikely.
Pockets of opportunities exist in emerging Asian economies for the company. While SCI is aware of the global trend towards green energy, it stated in its FY2019 Annual Report that "changing our portfolio mix will take time as there is a need to balance the transition with the goals of energy security, environmental sustainability, affordability and accessibility."
SCI continues to build up capabilities in renewables and still believes UKPR holds positive long-term prospects as the UK undergoes decarbonisation. Hopefully, SCI has learnt a lesson or two from managing UKPR, and will be more realistic in making forecasts and bidding for future energy projects.
(b) Marine
The Marine division operates under the subsidiary Sembcorp Marine ("SCM"), and is concerned with specialized shipbuilding, repairs and upgrades, rigs, floaters and offshore platform construction. SCM operates five shipyards in Singapore and has similar facilities located in Indonesia, the UK and Brazil.
Back in its heyday (when crude oil was trading above US$100 per barrel), the Marine division was a significant revenue generator for SCI. However, as the oil price crashed from a market supply glut, the Marine division turned into a severe drag on the Group, bleeding cash in recent years.
Graph 2 below charts the turnover and operating profit margin of the Marine division over the past five years.
The Marine division had managed to eke out a profit in only two of the past five years. With the upcoming demerger, the Marine division will become a separate legal entity from SCI and its future profit and loss will no longer have any impact on SCI's books.
Thus, I will not concern myself with developments in this sector.
(c) Urban
The Urban division is involved in master planning and transforming raw land into urban infrastructure. SCI has current projects in Vietnam, China and Indonesia. In FY2019, SCI had a net orderbook of 423 hectares and a land bank of 2,600 hectares, evenly split between land zoned for industrial and commercial/residential development.
The Urban division had a bumper year in 2019, earning an operating profit of S$177m (up 88% y/y) and a net profit of S$117m (up 36% y/y). This comes from the recognition of profit in Riverside Grandeur development in Nanjing, China, and two residential projects BelHomes and Sun Casa in Vietnam.
SCI has long been involved with Vietnam’s Becamex IDC in the master planning of the Vietnam Singapore Industrial Park (VSIP). The company recently saw brisk sales from the market for its industrial land in VSIP Quang Ngai and VSIP Nghe An, and for new mass market homes in VSIP Binh Duong and VSIP Bac Ninh.
In China, SCI continues to work on the Sino-Singapore Nanjing Eco Hi-tech Island (SNEI). The completed Jiangdao Intelligent Cube business park within SNEI will cater to companies specialized in artificial intelligence research and development. Meanwhile at a separate site, the International Water Hub in Nanjing, China will focus on companies researching on handling water pollution and effluent discharge.
In India, SCI and the State Government of Andhra Pradesh have mutually agreed to terminate the master development of Amaravati Capital City Start-up Area. (This wraps SCI's first Urban venture into India on a sad note.)
My observations:
The Urban division is turning out to be the spark in SCI's revenue growth, with a FY2019 EPS contribution of 6.5 Singapore cents (up 36% y/y) and quoted ROE of 11.4% (up 28% y/y). Despite the slowdown in China, SCI expects rental demand in their Wuxi-Singapore Industrial Park to remain resilient, as the tenants are in the higher value-added semiconductor sector. SCI continues to see strong market interest in its VSIP and SNEI projects.
Hopefully, this will cement SCI's expertise and reputation in master planning and industrial town development, thereby leading to more opportunities within Vietnam and China. The dissolution of the joint venure in India was a setback, but it should not have any material impact.
Conclusion:
The future of SCI's revenue portfolio depends on opportunities in the utility sector within emerging Asian economies, as well as future industrial and business park development in Vietnam and China. While the COVID-19 situation is a dampener, SCI's Energy and Urban divisions should be able to maintain recurring revenue and income in the near future. The company took a bad hit from impairment charges in 2019. Absent of these one-off items, SCI's bottom line should improve.
On the bright side, SCI's Board had reinstated the annual dividend from 4 to 5 Singapore cents. If SCI is able to maintain or even grow this DPS, it should reasonate well with investors.
In the demerger announcement, SCI elaborated on a pro forma basis, its FY2019 ROE will increase from 3.5% to 7.9%, and its ROA will increase 3.5% to 5.6%. Its debt load will fall from S$11.6b to S$8.7b as at 31 Dec 2019. OCBC Credit Research had highlighted that SCI's EBITDA-to-interest ratio should improve from 2.3 times to 3.2 times [news]. A healthier balance sheet is always a good thing. Broker analysts are generally positive on SCI's future post demerger, with some calling for a possible rerating of SCI [news].
If we are to compare SCI to its nearest competitor Keppel Corp, Keppel looks to be the more favourable of the two. This is because Keppel has its toes dipped in more diverse industries, ranging from telco (M1) and data centres (KDC Reit) to fund management. Keppel also has higher margins, ROE and dividend yield.
The silver lining for SCI though, is the headway it has made in Vietnam. The Asian Development Bank has forecasted for the country to achieve the highest GDP growth in 2020 (6.8 percent) among the countries in Southeast Asia [link]. It is also broadly agreed Vietnam has benefited from the ongoing U.S.-China trade war [news].
For now, I wouldn't hold SCI for the simple fact that I do not want odd lots of SCM after the distribution in-specie. The ROE of a pure utility operator isn't sexy either. But I do think one year down the road, SCI may be worth a review, once the growth path becomes clearer.
I used to be a SCI shareholder. I was attracted to the relatively defensive and geographically diversified revenue portfolio.
However, I sold all of my SCI shares in April 2019 after the Board opted to cut the dividend. Back then, the conglomerate was still making a reasonable 17 cents EPS, so I was disappointed with the Board's decision to distribute only 4 cents of annual dividend.
On hindsight, I was lucky to have gotten out at that time. SCI stock price had sunk 25 percent since then.
 |
| SCI price since April 2019. Data source: Yahoo! Finance |
With the loss-making SCM going out of the picture, I received inquiries coincidentally from both my friend and my spouse on whether SCI is worth investing now.
I hadn't been keeping track of SCI developments, so I decided to take a second look. What I wanted to know is whether SCI's revenue portfolio - excluding SCM's contribution - is still as resilient and positioned for growth.
SCI's businesses can be broadly classified into three categories:
(a) Energy generation and waste management ("Energy");
(b) Shipbuilding and repair ("Marine"); and
(c) Land and infrastructure development ("Urban").
Of the three categories, the main revenue drivers are Energy (64 percent in FY2019) and Marine (30 percent). Urban forms a tiny 0.1 percent of the turnover and the remaining is classified as "Others" (I presume these are revenue from assets held for sale).
(a) Energy
The Energy division is involved in electricity generation from thermal power (both coal and gas-fired stations), import and supply of natural gas in Singapore, industrial wastewater treatment, renewables and retail power sales. SCI's main power assets are distributed across Singapore, China, India, the United Kingdom and the rest of Southeast Asia.
 |
| SCI's power station in Myingyan, Myanmar. Photo credit: SCI |
With the recent focus on climate action, SCI has repositioned itself as a leading producer of green energy. It owns wind farms in both China and India, solar farms in India and Singapore and a battery storage system in the UK. Renewable energy now forms 22 percent of the total generation capacity. (For context, renewable energy was 14 percent of SCI's total generation capacity five years ago.)
SCI is also involved in industrial wastewater treatment and water reclamation, with facilities situated on Jurong Island, Singapore and in Zhangjiagang, China.
Lastly, SCI operates waste collection service in Singapore via its subsidiary SembWaste (you might have seen a SCI dump truck in your neighbourhood). In February 2020, SembWaste received approval by the Competition and Consumer Commission of Singapore to go ahead with its acquisition of Veolia ES Singapore, another local waste collection company [announcement].
 |
| A Veolia dump truck. Photo credit: Veolia |
Graph 1 below charts the turnover and operating profit margin of SCI's Energy division over the past five years.
 |
| Graph 1. Turnover and OPM of SCI's Energy division. Data source: SCI FY2019 Annual Report |
Revenue contribution from Energy has increased significantly over the years. However, the operating profit margin has declined to between 11 and 12 percent. While FY2019 EBITDA was up 17% year-on-year ("y/y") to S$1,309m, net profit dropped 38% y/y to S$195m.
Last year, SCI added new power generation capacity in Sirajganj, Bangladesh and Myingyan, Myammar. These assets should contribute to the turnover in the latest fiscal year.
While the company earned a net asset divestment gain of S$86m in FY2019, it incurred a whopping S$245m in impairment losses. The bulk of it (S$181m) was due to the markdown on SCI's United Kingdom Power Reserve (UKPR) assets. A confluence of reduced consumer demand (due to milder winters) and higher supply (from a delay in retirement of coal-fired power stations) resulted in tighter competition and lower margins, making the investment less valuable than projected.
 |
| SCI's United Kingdom Power Reserve (UKPR) system. Photo credit: SCI |
Additionally, SCI booked an impairment loss of S$64m on its Chilean water asset, currently on sale to Spanish engineering group SACYR SA. It also recorded a S$23m charge in Jiangsu, China, where the company deemed its current water assets will not be able to meet China's more stringent effluent discharge standards.
While SCI did not provide a breakdown of turnover and profit by country, it explained the revenue decline was attributed to lower gas sales and planned maintenance shutdown of power assets in Singapore. One thermal power unit was also shut down in India in 1Q 2019 due to a stator fault, and there was the absence of contribution from South Africa's municipal water operations post divestment.
Notable local events include SCI joining the foray into Singapore's Open Electricity Market under the Sembcorp Power brand and the acquisition of Veolia ES Singapore. SCI also recently signed an agreement with Singapore's PUB to build Singapore’s largest floating solar farm on the Tengeh Reservoir [announcement].
My observations:
With the demerger of SCM, the Energy division will become the main pillar of SCI's revenue and income. FY2019 EPS from Energy was 10.9 Singapore cents (down 38% y/y). ROA was 1.51% and SCI quoted a ROE of 5.3% (down 36% y/y).
SCI operates in the heavily regulated space of utilities and waste management. These industries require significant capital expenditures upfront and the actual return is only known a few years later. Segmental liabilities form 75 percent of assets. While turnover is consistent and recurring, outsized profits are rare and unlikely.
Pockets of opportunities exist in emerging Asian economies for the company. While SCI is aware of the global trend towards green energy, it stated in its FY2019 Annual Report that "changing our portfolio mix will take time as there is a need to balance the transition with the goals of energy security, environmental sustainability, affordability and accessibility."
 |
| SCI's wind farm in India. Photo credit: SCI |
SCI continues to build up capabilities in renewables and still believes UKPR holds positive long-term prospects as the UK undergoes decarbonisation. Hopefully, SCI has learnt a lesson or two from managing UKPR, and will be more realistic in making forecasts and bidding for future energy projects.
(b) Marine
The Marine division operates under the subsidiary Sembcorp Marine ("SCM"), and is concerned with specialized shipbuilding, repairs and upgrades, rigs, floaters and offshore platform construction. SCM operates five shipyards in Singapore and has similar facilities located in Indonesia, the UK and Brazil.
 |
| Sembcorp Marine Tuas Boulevard Yard. Photo credit: SCM |
Back in its heyday (when crude oil was trading above US$100 per barrel), the Marine division was a significant revenue generator for SCI. However, as the oil price crashed from a market supply glut, the Marine division turned into a severe drag on the Group, bleeding cash in recent years.
Graph 2 below charts the turnover and operating profit margin of the Marine division over the past five years.
 |
| Graph 2. Turnover and OPM of SCI's Marine division. Data source: SCI FY2019 Annual Report |
The Marine division had managed to eke out a profit in only two of the past five years. With the upcoming demerger, the Marine division will become a separate legal entity from SCI and its future profit and loss will no longer have any impact on SCI's books.
Thus, I will not concern myself with developments in this sector.
(c) Urban
The Urban division is involved in master planning and transforming raw land into urban infrastructure. SCI has current projects in Vietnam, China and Indonesia. In FY2019, SCI had a net orderbook of 423 hectares and a land bank of 2,600 hectares, evenly split between land zoned for industrial and commercial/residential development.
 |
| Artist's impression of SCI's International Water Hub in Nanjing, China. Photo credit: IWH |
The Urban division had a bumper year in 2019, earning an operating profit of S$177m (up 88% y/y) and a net profit of S$117m (up 36% y/y). This comes from the recognition of profit in Riverside Grandeur development in Nanjing, China, and two residential projects BelHomes and Sun Casa in Vietnam.
SCI has long been involved with Vietnam’s Becamex IDC in the master planning of the Vietnam Singapore Industrial Park (VSIP). The company recently saw brisk sales from the market for its industrial land in VSIP Quang Ngai and VSIP Nghe An, and for new mass market homes in VSIP Binh Duong and VSIP Bac Ninh.
In China, SCI continues to work on the Sino-Singapore Nanjing Eco Hi-tech Island (SNEI). The completed Jiangdao Intelligent Cube business park within SNEI will cater to companies specialized in artificial intelligence research and development. Meanwhile at a separate site, the International Water Hub in Nanjing, China will focus on companies researching on handling water pollution and effluent discharge.
 |
| The Sino-Singapore Nanjing Hi-tech Island in China. Photo credit: SCI |
In India, SCI and the State Government of Andhra Pradesh have mutually agreed to terminate the master development of Amaravati Capital City Start-up Area. (This wraps SCI's first Urban venture into India on a sad note.)
My observations:
The Urban division is turning out to be the spark in SCI's revenue growth, with a FY2019 EPS contribution of 6.5 Singapore cents (up 36% y/y) and quoted ROE of 11.4% (up 28% y/y). Despite the slowdown in China, SCI expects rental demand in their Wuxi-Singapore Industrial Park to remain resilient, as the tenants are in the higher value-added semiconductor sector. SCI continues to see strong market interest in its VSIP and SNEI projects.
Hopefully, this will cement SCI's expertise and reputation in master planning and industrial town development, thereby leading to more opportunities within Vietnam and China. The dissolution of the joint venure in India was a setback, but it should not have any material impact.
Conclusion:
The future of SCI's revenue portfolio depends on opportunities in the utility sector within emerging Asian economies, as well as future industrial and business park development in Vietnam and China. While the COVID-19 situation is a dampener, SCI's Energy and Urban divisions should be able to maintain recurring revenue and income in the near future. The company took a bad hit from impairment charges in 2019. Absent of these one-off items, SCI's bottom line should improve.
 |
| SCI's power station in Sirajganj, Bangladesh. Photo credit: World Bank |
On the bright side, SCI's Board had reinstated the annual dividend from 4 to 5 Singapore cents. If SCI is able to maintain or even grow this DPS, it should reasonate well with investors.
In the demerger announcement, SCI elaborated on a pro forma basis, its FY2019 ROE will increase from 3.5% to 7.9%, and its ROA will increase 3.5% to 5.6%. Its debt load will fall from S$11.6b to S$8.7b as at 31 Dec 2019. OCBC Credit Research had highlighted that SCI's EBITDA-to-interest ratio should improve from 2.3 times to 3.2 times [news]. A healthier balance sheet is always a good thing. Broker analysts are generally positive on SCI's future post demerger, with some calling for a possible rerating of SCI [news].
If we are to compare SCI to its nearest competitor Keppel Corp, Keppel looks to be the more favourable of the two. This is because Keppel has its toes dipped in more diverse industries, ranging from telco (M1) and data centres (KDC Reit) to fund management. Keppel also has higher margins, ROE and dividend yield.
The silver lining for SCI though, is the headway it has made in Vietnam. The Asian Development Bank has forecasted for the country to achieve the highest GDP growth in 2020 (6.8 percent) among the countries in Southeast Asia [link]. It is also broadly agreed Vietnam has benefited from the ongoing U.S.-China trade war [news].
 |
| Artist's impression of the Vietnam Singapore Industrial Park. Photo credit: SCI |
For now, I wouldn't hold SCI for the simple fact that I do not want odd lots of SCM after the distribution in-specie. The ROE of a pure utility operator isn't sexy either. But I do think one year down the road, SCI may be worth a review, once the growth path becomes clearer.
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