The Power Source behind SembCorp Industries Limited

Last week, I covered the business segments of SembCorp Industries Limited (SGX:U96). This week, I will be taking a closer look at the Utility business segment of the SembCorp conglomerate. The Utility business segment made up 47% of Sembcorp’s revenue for 2013.

As a brief recap: Over the past five plus years, SembCorp has been a steady source of dividends. Foolish dividend investors would be excited to know that the annual dividends has been increasing as well. Starting from 2009 (the company has a financial year which coincides with the calendar year), the dividend of S$0.11 per share had rose to S$0.17 by 2013.

For the first half of 2014, the company also announced a surprise interim dividend of S$0.05 per share. This was the first time an interim dividend was offered. Collectively, the company had paid out S$0.76 in dividends since 2009.

The capital gains for the SembCorp’s share price has been satisfying as well. From 1 January 2009 to its closing price yesterday, it delivered capital gains of around 114%. By comparison, the total returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 79% for the same duration.

A closer look

The Utility business segment can be grouped into three major product segments, namely energy, water, and onsite logistics & solid waste management.

Sembcorp utility graph 1

Source: Company Earnings Presentation

The Energy product segment contributed around 84% for the Utility business segment’s sales in 2013, followed by the Water product segment at 9.5% of sales. The Water product segment was also grew the most percentage wise, increasing by about 57% over four years.

Sembcorp utility graph 2

Source: Company Earnings Presentation

The Water product segment and the On-site Logistics & Solid Waste Management both exhibited strong net profit growth over the past four years. Both product segments also had net profit margins which were superior to that of the Energy product segment. The Energy product segment was affected by planned maintenance during the year. Interestingly, as a whole, the net profit of the Utility business segment grew despite the drop in turnover for 2013 compared to 2012. However, this is mostly due to the net profit form the corporate product segment which included proceeds of $117 million from the Salalah IPO in late 2013. Without these proceeds, net profit for the Utility business segment would be down for the year.

Sembcorp utility graph 3

Source: Company Earnings Presentation

Majority of the Utility business segment sales comes from Singapore. A significant 82.7% of sales came from Singapore, while UK came in second with 8.5% of sales. On the net profit side though, majority of the profits came from outside of Singapore.

Sembcorp utility graph 4

Source: Company Earnings Presentation

Quick look ahead

The pipeline for Sembcorp’s Utilities business segments appears to be healthy for the next few years.

In Feb 2014, the company announced a 45% stake in NCC Power Project in India which will involve building a 1,320-megawatt coal-fired power plant. The NCCPP project is expected to come online in early 2016. On the Water product segment, the company has five major projects in China lined up for 2014 and 2015.

SembCorp’s long term plan, which began in 2011, was to achieve power generation capacity of 10,000 MW by 2015. The company also intends to increase its water and waste water treatment capacity by 10 million cubic meters by the same year. As of end of 2013, SembCorp’s power generation capacity stood at 7,300 MW while its water and waste water treatment capacity was 8.6 million cubic meters; these figures include projects under construction.

Foolish takeaway

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the company’s share price is supported by the quality of growth that we are looking for.

The overseas projects for SembCorp is bringing strong results on the net profit and might be where Foolish investors should focus on. In particular, the NCCPP project in India will be a significant step forward. According to Chief Executive Officer Tang Kin Fei, the land area for the NCCPP project would equivalent to one third the size of Jurong Island. Overall, the project pipeline seem to indicate a stable growth moving into the future for the Utility business segment of SembCorp Industries.

SembCorp Industries currently trades at a price-to-earnings ratio of about 11 and has a dividend yield of 4.2% based on yesterday’s close.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.