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8 Quick Things Investors Should Learn About SembCorp Industries Ltd

Sembcorp Industries Ltd (SGX: U96) is one of the cool companies in Singapore that shares webcasts of their quarterly earnings presentations (the link for Sembcorp Industries is here).

There may be new information investors can pick out from these webcasts.

Last week, Sembcorp Industries had released its fiscal fourth-quarter earnings. I had spent some time watching the webcast for that particular earnings release and noted eight useful things investors can learn from it.

But before I share them, here’s a quick introduction for some context later. Sembcorp Industries has four business segments, namely Utilities, Marine, Urban Development, and Others. The former two are by far the most important for Sembcorp Industries and it’s worth noting that the conglomerate’s Marine business stems from its 61% ownership of SembCorp Marine Ltd  (SGX: S51).

You can read more about SembCorp Industries in here.

With that, here are the notes I have:

  1. Tang Kin Fei, the president and chief executive of Sembcorp Industries, kicked off the meeting with an overview of the company’s performance. He started with the Utilities segment. Net profit was up 72% for 2015. However, this was mostly due to divestment gains in SembSita Pacific, Bournemouth, and Zhumadian. Tang mused that the assets sold were the ones from which SembCorp Industries had been able to “get the maximum value.” The proceeds will be recycled into areas of higher returns and growth. Without the divestment gain of $425.6 million, the Utilities segment would have recorded a 19% decline in profit instead.
  2. Speaking of divestments, Tang also mentioned that Sembcorp Industries has signed a conditional agreement to sell its Yancheng municipal water business. Later on, Tang reminded the audience that Sembcorp Industries operates as a developer, owner, and operator. The conglomerate may choose to sell assets at the appropriate times to recycle its capital, as demonstrated this year.
  3. For the Utilities segment, the majority of the decline was due to sharply lower profits out of Singapore (a 33% fall).  The Singapore operations was hampered by lower spark spreads, a situation that Tang expects to last for the next couple of years. For 2015, Singapore made up 40% of the total Utilities net profit pie, with the rest coming from overseas.
  4. There were things to look forward to for the Utilities segment, though. Tang spent time talking about the second long-term power purchase agreement (PPA) with the Telangana Power Distribution companies. Under the agreement, 570 megawatts (MW) of power will be sold for a period of eight years. Together with an earlier agreement, Sembcorp Industries’ Thermal Powertech Corporation India (TPCIL) power plant has secured over 85% of its total net generating capacity under long-term agreements. This high percentage lifts the plant into the mega-power status which has the benefit of exemption from certain import duties. Sembcorp Industries will also be relieved from being a corporate guarantor. Later on, Tang said that the TPCIL India project is one of the most challenging projects that Sembcorp Industries has taken on in the last 20 years.
  5. Overall, the Utilities segment has total capacity (in operation or development) of over 10,000 MW in power generation and 9.2 million cubic meters per day of water capacity. Tang also showed a summary slide with projects – amounting to 3,800 MW and 1.3 million cubic meters per day of water – which is expected to be executed over the next three years. He expects part of the projects to start providing income in 2017.
  6. Finally, Tang spent time to outline Sembcorp Industries’ key priorities. The conglomerate will be looking to manage its cost, focus on prudent financial management, focus on project delivery, and to look out for opportunistic acquisitions.
  7. Koh Chiap Khiong, Sembcorp Industries’ chief financial officer, gave more colour on the company’s financials. Group capex was $1.4 billion with a good part of its expenditure going to marine yards in its Marine segment. Operating cash flow before changes in working capital was $1.35 billion for 2015. After working capital changes and taxes paid, operating cash flow was a negative $761 million for the year. Koh said that the changes in working capital was mainly due to SembCorp Marine’s ongoing rig building projects.
  8. SembCorp Industries ended the year with a net debt position of $5.2 billion, an increase from the $3.1 billion recorded on the same date the year before. Interest coverage fell as a result, from 20.8 times in 2014, to just 7.2 times in the same period this year. Part of the reason is the categorization of interest cost as an expense upon the completion of the TPCIL project.

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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.