Sembcorp Industries Limited (SGX: U96), or SCI, is an energy, marine, and urban development conglomerate that operates across multiple countries worldwide. The group has total assets of S$23 billion and over 7,000 employees.
SCI’s business has undergone severe pressure and challenges over the last few years, as electricity prices have tumbled in its key markets. Its oil and gas division, represented by SGX-listed Sembcorp Marine Limited (SGX: S51), is also caught in the grip of a multiyear industry downturn. Investors may rightly feel nervous about whether SCI can maintain its dividend.
I looked into three of the company’s business elements to assess if SCI’s dividend is sustainable.
No. 1: Free cash flow
If a business generates copious amounts of FCF, there is a better chance it can sustain its level of dividends. From the table above, SCI has a patchy record of FCF generation, with three out of the last five years displaying negative FCF. Moving forward, the group may have to continue to spend significant sums to build up its India power plant business, so there is a high chance of either low FCF or negative FCF generated for 2019.
No. 2: Dividends and payout ratio
SCI has been cutting its dividends since 2014, from a high of 16 Singapore cents to just 4 Singapore cents last year. I looked at the dividend payout ratio for SCI to determine if it was paying out a large chunk of its profits as dividends, but the payout ratio ranges from 20% to 40%, which shows that SCI is being conservative and is retaining the bulk of profits to grow the business.
The problem here is that earnings per share itself has been declining, so even though the payout ratio is low, that may be because management is aware that more cash is needed in order to just stay afloat, which is why dividends were cut so aggressively in successive years.
No. 3: Plans and prospects
SCI has many plans lined up for growing its business, announcing three of those recently. The first is its plan to inject new equity to grow its India renewables business, which includes wind and solar power projects. The group also signed a long-term agreement with Experia Events to install, own, and operate rooftop solar panels with a total capacity of 6.3-megawatt peak atop Changi Exhibition Centre.
Finally, SCI announced a partnership with CapitaLand Limited (SGX: C31) for the installation and operation of rooftop solar farms at six properties in Singapore owned by CapitaLand.
The problem is the lack of a dollar value attached to these business development efforts. Investors will therefore be kept in the dark as to how much capital is required to fund these initiatives. Also, these business development announcements require a gestation period and may not be immediately profitable or cash-flow positive.
The Foolish conclusion
Though Q1 2019 saw a better profit performance by SCI, its cash flow commitment remains heavy and its overall business continues to be under pressure. I conclude that there is a high chance of the group reducing dividends again should business not pick up for its various divisions.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of CapitaLand Limited. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.