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Sembcorp Industries: 16% Cheaper Now, So What?
Corporate Digest | 11 November 2014
By: Peter Ng
Articles (81) Profile

Following a decline in excess of 20 percent for oil prices since July, Sembcorp Industries suffered a similar fate when its share price fell 15.9 percent since 23 July from an intra-day high of $5.53 to its closing price of $4.65 on 10 November. What’s next for this blue chip?

The Business

Sembcorp Industries derives revenue from three business segments, namely utilities, marine and urban development, according to its FY13 annual report. Utilities and marine are Sembcorp’s main revenue drivers.


Its utilities segment, which generates almost 50 percent of the conglomerate’s revenue, can be further broken down into three parts. Firstly, Sembcorp Industries generates and supplies electricity in various countries in the world such as Singapore, China, United Kingdom and the Middle East.

Secondly, the company is engaged in the business of water treatment and processing of wastewater, with the capabilities of converting wastewater into either clean industrial or drinkable water depending on its application. Sembcorp Industries treats a combined capacity of 8.6 million cubic metres of water daily which serves the demand for water of more than five million people in the world.

Thirdly, the company provides a range of on-site logistics services, in particular solid waste management which mainly involves waste collection in Singapore and Australia. In Singapore alone, Sembcorp Industries provides waste collection services to more than 0.6 million households, schools and trade premises.

The combination of these three sub-segments offers a recurring revenue stream for the company, as the demand for service offerings under these segments are non-cyclical in nature. That is, regardless of how the economy performs, garbage has to be thrown and collected while water and electricity would still have consumed by households and corporations.

NEWater facility of Sembcorp Industries
NEWater facility of Sembcorp Industries; water is a need, regardless of the economy, people need to drink.


Via its 60.7 percent ownership in Sembcorp Marine, Sembcorp Industries derives 51.1 percent of its revenue from its marine business. Sembcorp Marine is the second largest rig builder in the world and provides a range of solutions including ship repair, vessel conversions and the building of various ships and rigs for applications in the offshore and marine sector.

Although perceived as more cyclical compared to its utility business, the adaptation of its strategy of shifting away from traditional rig building, has led the company’s marine segment to register a consistent net profit ranging between $326.7 million and $456.2 million (from FY11 to FY13). In addition, its order book stretches to as far as 2019.

Urban Development

The urban development segment involves works such as master planning, infrastructure development, and transforming raw land into large scale urban developments. Although the urban development segment is the third growth pillar of Sembcorp Industries and possesses a significantly high barrier of entry for other competing firms, however, it is currently making a rather immaterial contribution to the company’s bottom line, where figures are in the double digit territories between $28 million and $50 million from FY09 to FY13.

In April, the conglomerate has announced its plans to ramp up the urban development segment through the development of residential and commercial properties in its existing industrial parks. If all goes well, the urban development segment will contribute a “three-digit” figure to net profit by 2020, essentially doubling from its current state.

SI Research Takeaway

While the marine industry is undergoing an industry shift as Chinese shipyards present more affordable rig building solutions that erode margins of the company, however, Sembcorp Industries,  backed by a close to recession-proof business in utilities, will still be able to gradually grow and generate a sustainable revenue stream for the company.

Coupled with a reasonably strong balance sheet position with a net debt to equity ratio of 0.4, this puts the conglomerate in a favourable position as it pursues the next phase of growth in the urban development sector.

Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

Please click here for more information about this author.

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