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Thursday, November 6, 2014

Recent Action - Sembcorp Industries

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.

23 comments:

  1. I'm tempted to nibble @ $4.6 ... :)

    ReplyDelete
    Replies
    1. Too hungry this morning, so nibble @ $4.6 ... Lol

      Delete
    2. Nice!!!

      Panadol dosage not enough for me. Any higher medication??

      Delete
  2. Tried looking for CMP results but couldn't find any mention, do you have a link? Thanks! :)

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    Replies
    1. Hi Justbe

      You should be able to find them in sgx announcement.

      Delete
  3. Hi B,

    I am now onboard.

    I do not see sembcorp results as bad, on the contrary, I think it is a OK results.

    1) UK impairment has stopped, it is turning in profits, and is stable QoQ. Think we do not need to worry about that as a spanner.
    2) Like you said, take away the one-off gain, the fall in utilities look harmless.

    Singapore is the biggest worry, IMO, they are liberalizing the electricity sector in SIngapore, I believe competition is set to increase. However, I do not think they will be in anyway be "killed" by competition on hometurf.

    The overseas growth should offset it, barring China throwing in another spanner.

    It looks like China will be a significant contributors in years to come, given they have 3 projects in the pipeline.

    Overall, I think Mr market is in a depressing mood... on Sembcorp

    ReplyDelete
    Replies
    1. Hi Sillyinvestor

      Welcome onboard ;) seems there are plenty onboard now at this price.

      The results are not bad its just market have expectationa regarding the growth they are supposed to meet. Super and Osim would be a very good example of failure to meet growth and we can see how they have fallen. Sci is rather less structural as compared to the other two.

      Delete
  4. Thanks for the post, its a very good read~ Keep it up man ^^

    The fall in net profit for utilities for 3Q14 was mainly because 3Q13 saw gains from the IPO of Salalah, offset by an impairment made for operations in the UK; excluding these one-off items, SCI achieved a 10% net profit growth in the utilities segment in 3Q14.

    At 10 times earnings, SCI is really very attractive in terms of valuations. With its strong pipeline of projects coming online from India and China, I will be looking forward to 2015 and 2016 earnings growth.

    The only thing I am worried about is the long term debt that semb marine has taken this year, which brought SCI's net gearing towards the 20% level.

    I am currently vested and looking forward to pick up more shares

    Cheers

    ReplyDelete
    Replies
    1. Hi Felix

      Thanks for your kind words.

      We now hope that the drop in margins are not structural otherwise they could be down much more than we imagined.

      I am confident they will pick up just not in the near term.

      Delete
  5. Like i said before, the market was overly optimistic regarding Sembcorp's growth developing markets.

    That said, 11x EV / EBITDA with stable cash flow is solid.

    Regards,
    JW

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    Replies
    1. Hi JW

      Absolutely on that.

      The market and analyst have weighed in too much optimism on the utilities segment and both together with marines do not perform they only hadone way to go.

      Delete
  6. Replies
    1. Too much love given.

      Blue chip becomes black chip.

      Delete
  7. grab some at 4.55, averaging down... but average is still high haaa

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    Replies
    1. Hi Gold

      4.55 is a great price to enter. I was contemplating whether to add but thought I will use my bullet at a later stage. Who knows there might be further opportunities.

      Delete
    2. Nibble @$4.6 for breakfast, tempted to nibble @4.55 for lunch ... Well hope next meal can be more attractive :)

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    3. ya hoping to average down seeing the paper loss, but it still stands at 4.8. hope it dun tempt me again haha bullets running low

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    4. I think maybe no need to worry too much about paper losses, the valuations are great with a decent margin of safety. Short term it may continue to be very volatile but one can see it as a great opportunity instead. I currently hold 12 lots, have been buying from $5.00+ level all the way down, bought more today and will definitely add more if it continues to sell for even cheaper.

      If you have pockets aces don't be afraid to go all in

      Cheers ^_^

      Delete
    5. I'm waiting for a neighbourhood "Zap Cai Peng" price, $3.50? ... lol ;p

      Delete
  8. Wah you nibble too fast in between breakfast and lunch.

    It needs a lot of money just to buy the 1 lot!!!

    ReplyDelete
  9. for those waiting and waiting for lower prices, here's what I think and I may be very wrong, lol

    eventually SCI will get sold down to a level that's really too cheap for analyst to ignore, like a herd they will change their hold/sell calls into buy calls sending SCI to a quick rally.

    ReplyDelete
  10. SCI rebounded 2.5% today!
    congrats to those who bought in last friday

    Cheers

    ReplyDelete

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