Sembcorp Industries Ltd (SGX: U96), or SCI, is a leading energy, marine, and urban development group that operates across multiple markets worldwide. SCI has total assets of over S$24 billion and over 7,000 employees and is a component of the Straits Times Index.
SCI recently reported its Q2 2019 earnings, and though certain aspects of the financials were much better than last year, significant challenges remain that may impede the group’s path to better profitability. Recall that SCI has been in a multiyear slump due to stress in its energy business and a slump in oil prices affecting its marine business. ROE has collapsed, while dividends have been massively slashed in the last five years. Investors may wonder if there is any light at the end of the tunnel, and whether the cycle may be turning for the group.
Let’s take a look at a few aspects of SCI to discern how the group has performed, and how it may fare in the future.
Energy division: mixed results
The energy division showed a mixed result, with revenue remaining almost flat for H1 2019 while net profit improved from S$155 million to S$177 million. The slightly better performance was driven by Southeast Asia (excluding Singapore), India, and China. Profitability in India, particularly, improved by 46% year on year to S$35 million, while the company took on an equity injection of S$101.6 million to support the growth of India’s renewables business.
The outlook is positive for Singapore with solar capacity power growing more than 40% to 166 MWp, but H2 2019 will see a major maintenance shutdown for power-generation assets that may affect both revenue and profit.
Marine division: outlook remains poor
The marine division, under Sembcorp Marine Ltd (SGX: S51), continued to suffer from lower overall business volume and recorded a loss of S$6 million in H1 2019. The loss was narrower compared to the S$32 million net loss during the same period last year. Sembcorp Marine is expecting full-year losses due to the continuing challenging environment for the offshore and marine sector.
Source: Sembcorp Industries Q2 2019 Presentation Slides
SCI continues to reposition its business to tackle the various challenges ahead. In the diagram above, investors can clearly see what SCI has already accomplished, what is in progress, and what is being planned. Management has devised a very organised plan to right-size the business and to put the group back on the growth path, but this plan will take time, resources, and a lot of effort to execute properly.
Still, it’s heartening to see that management has put in the effort to come up with a comprehensive plan to not just restart growth, but also to recycle capital in order to redeploy it to more productive use. Such efforts are commendable, and investors should be happy to see them.
Muted outlook with challenges remaining
In summary, SCI continues to report a muted outlook as challenges remain in all aspects of its business. While there were bright spots within the energy division, the overall outlook remains tough. The group has declared an interim dividend of S$0.02 per share, unchanged from last year. Investors need to continue to be patient as the group executes its repositioning strategies.