A Cross-Border Investing Battle: Singapore and Malaysia’s Utility Stocks

Utility stocks can be suitable investments for income investors. That’s because utilities tend to have stable businesses that can withstand wild swings in economic conditions; that stability in turn can generate a stable stream of income for investors.

With this in mind, let’s pit two of the largest utility companies in Singapore and Malaysia against each other. The aim is to find out which has the better business fundamentals.

In Singapore’s corner we have Sembcorp Industries Limited  (SGX: U96). And, hailing from Malaysia’s stock exchange is Tenaga Nasional Berhad (KLSE:5347.KL).

An introduction

Although SembCorp Industries has a sizeable offshore & marine engineering business, its utilities segment is still the dominant one. To the point, the utilities segment had generated 44% of Sembcorp Industries’ total revenue in 2015 and over 100% of total profit.

Meanwhile, the RM74.6 billion (S$25 billion) Tenaga Nasional dominates Malaysia’s electric utility market. The company provides the Malaysian public with electricity generation, transmission, and distribution services.

Since 2000, both companies have generated positive returns for investors. Tenaga Nasional’s shares have gained 188% (in ringgit terms) with dividends reinvested over the past 16 years. As for Sembcorp Industries, its shares have delivered a return of 102% (in Singapore dollar terms) over the same period after accounting for reinvested dividends.

It’s worth mentioning that Sembcop Industries has still managed to achieve its total return of 102% even after seeing its shares fall by 40% in the last 12 months alone due to the poor business performance of its listed offshore & marine arm, Sembcorp Marine Ltd (SGX: S51). Sembcorp Marine had been a victim of the crushing collapse in the price of oil over the past two years.

A comparison of size

Sembcorp Industries has a strong business presence in many countries (for instance Singapore, India, China, Bangladesh, and even Myanmar). This is unlike Tenaga Nasional, which operates only in Malaysia. But interestingly, it’s still the latter company that’s the larger of the two.

In its fiscal year ended 31 August 2015 (FY2015), Tenaga Nasional’s revenue and profit had clocked in at RM43.3 billion (S$14.4 billion) and RM6.1 billion (S$2.05 billion), respectively. Sembcorp Industries, on the other hand, had reaped ‘just’ S$9.5 billion in revenue and S$550 million in profit in the calendar year 2015.

A comparison of profitability

Sembcorp Industries’ profitability was badly hit in 2015 because of Sembcorp Marine’s weak results. According to data from S&P Global Market Intelligence, Sembcorp Industries had produced a return on asset and return on equity of just 0.7% and 5.9%, respectively, in 2015. But if we look further back in time, Sembcorp Industries’ performance looks better; it had an average return on asset of 5.6% from 2010 to 2014.

Coming to Tenaga Nasional, the Malaysian utility company had produced a return on asset of 4.6% in FY2015. Its return on equity was also healthy at 13.3%. It’s worth nothing that Tenaga Nasional had exhibited the stronger profitability metrics even while it had utilised lower leverage. To the point, in FY2015, Tenaga Nasional had a debt to equity ratio of 66.2%; in contrast, Sembcorp Industries had a debt to equity ratio of 85% in 2015.

Comparing valuations

At its current price of S$2.66, Sembcorp Industries has a trailing price-to-earnings (PE) ratio of just 9. That said, investors should be aware that there’s a risk of Sembcorp Industries’ future profits falling significantly given the ongoing downturn in the conglomerate’s offshore & marine arm.

Tenaga Nasional, meanwhile, trades at 13 times trailing earnings. The Malaysian company has a PE ratio nearly 50% higher than its Singapore counterpart. But, due to Tenaga Nasional’s relatively more stable business model, perhaps the higher valuation is justifiable.

Foolish Summary

Summing it up, Tenaga Nasional is the one with the size-advantage and better profitability while Sembcorp Industries is the cheaper stock. While what I’ve shared can be a useful starting point for deeper research, they should not be taken as the final word on the investing merits of the two companies.

Which of the two do you think would be a better utility investment for investors? Share your thoughts with us in the comments section below!

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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 writer Stanley Lim does not own shares  in any companies mentioned above.