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2 Clear Indications Sembcorp Industries Limited’s Business Is Suffering

Sembcorp Industries Limited (SGX: U96), or SCI, is a blue chip conglomerate with interests in energy, marine, and urban development. It operates across multiple markets worldwide, has total assets of over S$23 billion, and employs over 7,000 staff.

As I mentioned before, blue chip companies are still subject to competitive forces and disruption, just like any other company. The reason we label them as blue chips is because they have grown large over the years and are considered stable, resilient stalwarts. SCI has seen an erosion in its net profit over the last few years as competitive pressures mount, and there are two other clear indications that its business is suffering.

1. Declining return on equity

Return on equity, or ROE, measures the profitability of a company in relation to its capital base. ROE can assess how well a company manages its investments and deploys its capital in order to generate earnings growth. Here’s the five-year ROE trend for SCI:

Source: SembCorp Industries’ FY 2018 Annual Report

SCI’s ROE has been falling for four consecutive years, from 15.2% in 2014 to 5.8% in 2017 (note that 2017’s numbers were restated in 2018 following the retroactive adoption of a new accounting standard). The most recent fiscal year (FY 2018) saw a further deterioration in ROE to just 5.1%.

This ROE decline is symptomatic of problems within the group, as it demonstrates that SCI is witnessing an erosion in profitability per dollar of equity.

2. Decline in dividends

Another tell-tale sign of poorer business performance is a persistent cut in dividends. In SCI’s case, the graph below says it all:

Source: SembCorp Industries’ FY 2018 Annual Report

SCI’s dividend per share has declined for five consecutive years, from a high of 16 Singapore cents back in FY 2014 to a low of 4 Singapore cents in FY 2018. To put things in perspective, the total dividend per share was reduced by a whopping 75% in just five years! When companies slash dividends so drastically, it points to declining free-cash-flow generation, which necessitates the cutback in dividends in order to conserve cash.

Is there light at the end of the tunnel?

There just may be a smidgen of light appearing for SCI at the end of this long, dark tunnel. In its Q1 2019 earnings press release, the Energy business performed well with improved contributions from both India and the UK. Net profit from the Energy division was up 21% year on year, but the Urban Development and Marine divisions continued to face declining year-on-year profits. Still, the improvement in Energy may be sufficient to offset the weakness in the other two divisions, so investors can hold out hope for better days ahead.

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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 Royston Yang does not own shares in any of the companies mentioned.