Thursday, February 27, 2014

Sembcorp Industries - Stable Earnings Results FY13 & Outlook Ahead

Sembcorp Industries saw FY13 revenues rising 6% while net profit climbed 9% year on year.
Its Utilities core business delivers a steady performance compared to 2013, achieving 20% growth in net profit yoy. Other key performance round-up includes:
  • Turnover at S$10.8B, up 6%
  • Profit from Operations at $1.3B, up 4%
  • Net Profit at $820M, up 9%
  • EPS at 45.7 cents, up 8%
  • ROE at 17.1%
  • Dividends at 17 cents (including 2 cents special dividend)
When I purchased it last week, I expected the FY EPS to come in at least 45 cents/share. It actually exceeded my expectations a little bit. Having said that, I was expecting a little more performance from its utilities in the Q4, but at the end I guess i can't complain much if it is achieving a 20% growth year on year right.
The Group breaks their segment down into 4 categories, but the main segment I wanted to really focus in on the utilities portion. I suspect the margins for Marine is going to undergone a few competition and I would be glad if they can just achieve similar profits like this year. Urban development on the other hand plays too small a part in making a huge contributions to SCI earnings.
Utilities Sector
Having already achieved a 20% growth this year, the management is still confident that the company can deliver a better and steady performance in 2014. Great.
So where can we expect the better performance from?
It appears that the management is focusing on growth in the key emerging market like China, India and Middle East in the next few years. Based on geographical statistic alone, you can probably see the shift play from local to overseas market. In fact for FY 2013, the overseas market contributes a higher net profit at 51% than the local market at 49%. Based on this, you can see why they have been aggresively expanding into other overseas market which they think will give them the growth they want.
  • On Feb 26, the Group announces the acquisition of 45% stake in India's NCC Power Project which will double Sembcorp's power generation capacity in India and expect earnings onstream in 2016.
  • On Feb 25, the Group announces the expansion of its wind power capacity in Hebei and industrial water capacity in Nanjing which will double its capacity in renewable energy to 380MW. Earnings are expected to come onsteam in 2015.
  • The Group is also pursuing other opportunities in the ASEAN market such as the 1,200 MW coal-fired power project in Vietnam.
                                                          Net Profits (S$ M)
FY 2013 FY 2012 Change %
Singapore 226.2 262.6 -14%
Rest of ASEAN incl. AU and IN 45.4 49.9 -9%
Middle East & Africa37.330.423%
UK 10.0 15.3 -35%
Americas 4.8 7.7 -37%
The Group's vision 10/10 is expected to come in from the above emerging market which we believes will provide the necessary growth for Sembcorp. They are expecting the energy sector to grow to 10,000MW by 2015, which is a 37% increase from the current 7,300 MW. For water, they are expecting it to grow to 10m3/day in 2015, which is a 16% increase from the current 8.6m3/day. In fact, they are such confident of the demand that they are expecting over 3000MW of power and 1.5Million m3/day of water treatment capacities to come onstream from 2014 to 2016.
                                              Vision 10/10
2011 Today 2015
Energy (MW)          5,600          7,300          10,000
Water (m3 in Millions/day) 6.0 8.6 10.0
Assuming that management is bullish and we now expect another 20% growth in the utilities net profits in 2014, we will see net profits at S$539.88M. Given that the net profits in the other segments remain constant, we will see a total net profit of S$910.38, which is approximately 11% increase yoy. EPS would be at about 50 cents/share yoy which would be fantastic from investors point of view.
Net Profits (S$ M) % Growth
2009 226.7 13.2%
2010 231.2 2.0%
2011 304.4 31.7%
2012 374.6 23.1%
2013 449.9 20.1%
2014                             ?             ?
I think that this is a stock to keep for the long term. The growth shown in the utilities segment looks like they have plenty more room for an upside especially if their vision 10/10 does come true. The one thing I'm probably worried is on the marine segments, which will face competitive margins for years to come.
Another thing which I don't like about Sembcorp (which I have mentioned in my previous posts) is the habit of its management to do daily share buyback of a company. Some people may argue that it has the same effect of reducing the outstanding market share which will boost up earnings per share and dividends eventually but I would rather they give out higher payout ratio to investors to decide themselves on what to do with the money. Imagine that should Sembcorp trade at extremely high PE and price and they still do share buyback on a daily basis, is that doing a favor for maximizing shareholders value?  I guess this is a small downside which I don't really like but I must say the CEO and team have been growing this company well from the past till now and to the future.


  1. Replies
    1. Hi Uncle CW

      I am satisfied though a higher payout (instead of daily share buyback policy) would be great.