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How Did The Utilities Business Segment of Sembcorp Industries Limited Fare In 2016?

Sembcorp Industries Limited (SGX: U96) is one of the Singapore stock market’s largest conglomerates. It has three major business segments right now: Utilities; Marine; and Urban Development & Others. The Marine segment’s results come mainly from Sembcorp Industries’ 61% ownership stake in Sembcorp Marine Ltd (SGX: S51).

Sembcorp Industries recently announced its 2016 full year results. Given the number of business segments the conglomerate has – and how different they are – I thought it would be useful for investors to take a separate look at the performance of each of the segments. In this article, I will have a quick review of the Utilities segment.

Here’s an introduction from Sembcorp Industries’ 2015 annual report on what the Utilities segment does:

“The Utilities segment’s principal activities are in the provision of energy, water, on-site logistics and solid waste management to industrial and municipal customers.

Key activities in the energy sector include power generation and retail, process steam production and supply, as well as natural gas import, supply and retail.

In the water sector, the business offers wastewater treatment as well as the production and supply of reclaimed, desalinated and potable water and water for industrial use.”

The following table shows how the various sub-segments in the Utilities business performed in 2016 and 2015:

Sembcorp Industries utilities segment revenue table
Source: Sembcorp Industries 2016 results announcement

In 2016, the Utilities segment saw its revenue dip by 3%. The lower top-line is primarily due to lower HSFO (high sulfur fuel oil) prices recorded during the year which were partially mitigated by higher turnover from the segment’s projects in India and Myanmar.

Here’s a table showing the profit of the various sub-segments for the Utilities business in 2016 and 2015:

Sembcorp Industries utilities segment profit table
Source: Sembcorp Industries 2016 results announcement

In all, the net profit for the Utilities segment had dropped by over 50% in 2016. But if exceptional items were removed, the segment’s bottom-line in 2016 would be 5% better than in 2015.

The improvement is driven primarily by record profits from operations in China, which more than offset a loss of $23 million in profit contribution from the On-site Logistics & Solid Waste Management sub-segment due to a divestment made during the year.

What lies ahead for the Utilities segment

Looking ahead, Sembcorp Industries expects its China operations for its Utilities segment to “remain steady,” although the numbers are not expected to be as good as in 2016 due to the expiry of a joint venture agreement.

In Singapore, the centralized utilities, gas and solid waste management businesses are also “expected to remain steady.” The exception is the power business, which will continue to face “intense” competition.

As for India, Sembcorp Industries has two thermal power plants operating in the country. One of the plants, the SGPL, which started operating only in February this year, is likely to be negatively impacted due to the fact that (1) it has yet to secure long-term power purchase agreements, and (2) spot and short-term power tariffs remain weak.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.