How Did The Utilities Business Of Sembcorp Industries Limited Fare In The First Quarter Of 2017?

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’ 60.99% ownership stake in Sembcorp Marine Ltd (SGX: S51).

Sembcorp Industries recently announced its 2017 first quarter 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 look at the performance of the different segments. In this article, I will have a quick review of the Utilities business.

Here’s an introduction from Sembcorp Industries’ 2016 annual report on what the Utilities segment does:

“The Utilities segment’s principal activities are in the provision of energy and water to industrial, commercial and municipal customers.

Key activities in the energy sector include power generation, process steam production, as well as natural gas importation.

In the water sector, the business offers wastewater treatment as well as the production of reclaimed, desalinated and potable water and water for industrial use. In addition, the business also provides on-site logistics, solid waste management and specialised project management, engineering, and procurement services.”

The following table shows the revenues of the various sub-segments in the Utilities business in the first quarters of 2017 and 2016:

Source: Sembcorp Industries 2017 first quarter results presentation

As you can see, there was strong revenue growth from the Energy sub-segment (a 56% jump). The Water sub-segment did not fare too badly either with an 8% revenue increase. The On-site Logistics & Solid Waste Management sub-segment was the laggard as its revenue declined slightly.

Next, here’s a table showing the profit performance of the various sub-segments in the first quarters of 2017 and 2016:

Source: Sembcorp Industries 2017 first quarter results presentation

Despite the revenue growth from the Utilities segment, its bottom-line had actually shrunk in the first quarter of 2017. The Energy sub-segment was the main culprit as its profit fell by 56% to S$20.8 million.

The weaker performance was driven mainly by the sub-segment’s second thermal power plant in India, Sembcorp Gayatri Power Limited (SGPL). The plant, which commenced operations in February 2017, faced weak spot and short-term power tariffs as it has yet to secure value-enhancing long-term power purchase agreements.

What lies ahead for the Utilities segment

Looking ahead, the Utilities segment’s China operations is expected to deliver a lower performance in 2017 compared to 2016 due to the expiry of the Yangcheng cooperative joint venture agreement in 2016.

In India, Sembcorp Industries expects SGPL’s performance to be “adversely affected” due to the aforementioned problems with the plant. The company has two thermal power plants in India, in addition to some renewable energy assets. In all, Sembcorp Industries has power capacity of 3,800 MW in India.

As for Singapore, “the centralized utilities, gas and solid waste management businesses are expected to remain steady.” But, Sembcorp Industries also added that the “power business continues to face intense competition.”

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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.