Thursday, 24 November 2016

Sembcorp Industries turning around soon?

The recent plunge in oil price has affected the oil and gas sector badly, which has rocked Semb Marine’s corporate performance. That, in turn, has dragged Sembcorp Industries’s earnings too, as marine business still contribute a significant chunk of Sembcorp’s revenue (about 45% as of Q3 2016). Sembcorp’s share price has not been spared and dropped more than 50% from $5.5 to $2.5.

However, under the doom and gloom has been a common narrative running behind the investment merit of Sembcorp: it is more than just a Marine company and it has a promising and growing utilities business that is well-positioned to capture the rising demand for energy and water treatment services among the emerging economies.

So, if an investor wished to capitalise on Sembcorp’s current depressed valuation/share price and profit from its turnaround in future that’s envisioned to be led by the utilities business, he needs to study the  performance of its utilities segment up till 9M 2016 to determine whether there are green shoots and signs of improvement, and if possible, form an opinion on the sustainability of its utilities segment growth into the near future.

Let’s look at the most recent Q3 report and go back 8 quarters to study the numbers:

Based on the table, the group figures show that:
  • Its revenue, gross and net profit has improved in the latest quarter
  • Net ops cash flow improved from 67m Q1 2016 to 838m in Q3
  • Free cash flow turned positive at 632m after 7 quarters of negative cash flow
  • Utilities revenue and profit have grown compared to last 2 quarters, which seem to be at the bottom over the examined time range

We go deeper into the utilities segment for the most recent 3 quarters:

  • Utilities PFO has grown from $154m Q1 2016 to $211m Q3 2016 (37%)
  • Net profit wise, Q2 didn’t show any growth over Q1, while Q3 has grown to $108m from $74m in Q2 (46%)
  •  Q3 PFO and net profit grew 31% and 21% respectively over Q3 2015
  •  China revenue, PFO and net profit only started showing meaningful q-on-q growth in Q3. Year-on-year, its PFO and net profit improved significantly in Q3 2016 (65% and 72% respectively)
  •  India seems more promising:
o   Year-on-year, revenue for the 3 quarters grew by at least 100%. Q3 revenue is also more than 3x Q2 revenue
o   PFO had sustained q-on-q growth over the 3 quarters. Compared to 2015, all 3 quarters grew in excess of 100%
o   From sustained loss in 2015 and Q1 2016, it turned around to record profit in latest 2 quarter, with significant earnings growth to $18m from $4m in Q2

I sense that the utilities business may finally be seeing some light at the end of tunnel, particularly in the emerging markets shown by the encouraging results in latest quarter for China and India. The overall revenue, gross, net profit have improved in latest quarter. It is also finally seeing positive free cash flow, with much improved net ops cash flow this quarter.

Of course one needs to be aware that there continues to be pressure in other parts of the utilities business. For example its biggest revenue contributor Singapore still faces intense competition that drives down the power price. Not to mention that marine business will continue to face a long winter ahead with depressed performance.

The above analysis only touches on the business side of things and its figures. Investors have to make a judgement call here to decide if Sembcorp Industries is a worthy company to consider at this juncture. For those that have been monitoring Sembcorp results closely and believe in the potential of its utilities segment, they may be able to make a decision. Some may have other questions and need more data to consider next course of action. Seldom can a company’s investment decision be based on such simple analysis at a superficial level for a totally new investor.

However, as I am vested and have been monitoring Sembcorp for quite a while, these information are sufficient for me to form a more positive outlook for its business going forward. I will probably pay much closer attention to its next quarterly results, and be able to decide whether to buy more in near future. I also leave readers with a table summary of major milestone and contract announcements for its utilities segment in the recent quarters, which should be useful as a guide to assess future utilities performance. 

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