It has been a busy start to the month as I had added a couple more CMP (who had just reported great results today btw ^^) yesterday to my portfolio and now Sembcorp Industries upon further price weakness.
Having previously accumulated SCI at $5.08 sometime in August this year (See post here), I have purchased another 2 lots of SCI at a price of $4.73.
Readers of my blog would have known that I’ve blogged quite regularly about SCI a couple of times and have mentioned the concerns in my previous couple of posts, so this post is really about highlighting something which I have not really done previously and hope they can be useful.
This post will also be timely as I will go through their Q3 results, just announced today!!!
Segmentation Weakness in "Utilities"
It is quite ironic that we are highlighting the utilities portion as the weakness this time round as investors have been buying its shares precisely because of its utilities generating capability (and not the marine these days I suppose).
If we take a closer look at the different business segmentation that falls under "Utilities", we know that “Water” and “Solid Waste Management” are growing relatively well. The same goes for “Energy” related segment for their overseas operations which are growing steadily.
The main cause for concern is coming from their Singapore operations, which management has cited as having some serious intense competition. Luckily for investor, they are trying to diversify and focus their attention increasingly on their overseas operations, which now makes up 48% of utilities net profit (versus 52% Singapore operations).
Singapore is becoming an attractive hub for energy facilities and you can see the various energy grids that spreads out all over Singapore. Senoko Power Station is thus far the largest power station in Singapore with capacity of 3,300 MW.
Sembcorp generating facility in Singapore consists mainly from Sembcorp Cogen and Sembcorp Power, which currently builds up to about 1,215 mw capacity, with the recent completion of the cogeneration plant on Jurong island. Together, these facilities extend Sembcorp’s capabilities to serve customers in Jurong Island’s new Banyan, Tembusu and Angsana growth area and strengthen its position as the premier supplier of energy in the region. Nevertheless, competition for Singapore market remains intense with the many bigger players taking on demand across Singapore due to lower price and margins for the fiercely battled energy market.
The “Uniform Singapore Energy” Price Index, which technically measures the revenue for the utilities segment, has been on a slide downwards since 2012 when it hits a high of $222/mw back then. In 2013, the index slides down further to an average of $173/mw and today we see them at a low of $141/mw, which is causing some serious margins concerns for generators. It appears that the global world concern for oil and energy prices have affected the companies margins in recent times.
Q3 Results
The "Energy" segment is playing catch up in Q3 as they had performed much better than the previous two quarters. Even though the total net profit is still down from previous year, do note that last year figure includes the Salalah IPO gain. Excluding this item, the 9M13 net profit would have been $305.1 million instead.
I am actually quite surprised that for this quarter the China geographical segment is down by quite a bit whereas the geographical segment for Singapore has actually improved. I hope this will become a trend moving into the future.
The "Marine" business is doing better than last year, despite lower margins but higher order books. The results seem to be below many analyst's expectations who expected more from their rig business.
Conclusion
The fall in energy prices worldwide, along with its Singapore operations will continue to remain a drag for the near term. I suspect the same could be said for the marines.
Unless you are a patient investor, this will probably not a stock you want to own. However, should you be willing to wait for long term, I think the company should do decent over time as it has proven for years (annualized ROE at 14.2%).
At current price, the stock is trading at 10.12x earnings, which is about half a standard deviation away from mean and is somewhat attractive enough for entry in my opinion.
Even the company itself has made several stock buyback in recent weeks which shows probably some glimmer hope to support its downtrend falling price.
Invest or no invest?
In any case, 15 cents panadol for consolation next year in May :)
Anyone else looking at this counter? Would love to hear your thoughts.
