Sembcorp Industries’ is firing on all cylinders: net profits recovering, dividends growing.
A few years ago, no one wanted to touch Sembcorp Industries. Today, its shares have climbed up close to 20%.
Its comeback story, along with other Singapore blue-chips have been a garden of delight for investors.
Can shares of this utilities giant continue to go up? Let’s take a closer look.
Sembcorp Industries is one of the few Singapore blue-chips that have made the right move to restructure its assets.
In my opinion, it’s a bold move to hive off its offshore marine business. After the 2015 oil price crash, oil & gas assets are virtually dead on Sembcorp’s balance sheet, waiting to be picked off by vultures.
Now, I’ve noticed what’s really interesting is that Sembcorp Industries, a heavy utility player, is becoming more capital-efficient. That’s rare.
After shedding off loss-making assets, Sembcorp Industries’ ROE has grown from single digits to double-digits. Its net profit margins also expanded. Its assets more productive.
Okay, so Sembcorp Industries doesn’t quite match the capital efficiency of many high-quality US companies.
But what it lacks here makes up for in recurring profits. At S$11 billion, Sembcorp Industries Ltd is one of the biggest utilities giants in Singapore. A large portion of Sembcorp Industries net profits are backed by Power Purchase Agreements (PPA) in Singapore. These agreements often stretch up to 20 years, giving the company strong earnings visibility.
Plus, utilities are highly regulated that further supports Sembcorp Industries’ monopoly. What’s more, Sembcorp’s a leading power producer to data centres, capturing over a third of Singapore’s demand.
It’s a wet dream for dividend investors.
Last year, Sembcorp’s profits fell because of lower gas prices and offtake volumes in Singapore. But still, it made S$727 million net profits on S$4.6 billion in revenues.
That’s a good chunk of income.
What’s more, management said it will raise its stake in Senoko and will be on track to complete a 500MW hydrogen gas-fired power plant. Good for its gas service segment.
Is this a turning point for Sembcorp Industries?
While I’m not certain Sembcorp Industries Ltd will continue to add future investments in gas services, I believe this segment has somewhat reached a peak. Growth from this segment is likely to be modest.
This is why Sembcorp has been actively expanding overseas. But the fact is these overseas PPA are typically reserved for domestic players in their respective markets.
My take is: The next growth driver will likely come from its renewables and urban solutions segments.
Over the last three years, the company has poured billions of dollars of capex in both segments. Last year, capex doubled to S$1 billion into its clean energy business.
It has also quadrupled its renewable capacity – from 2.6 GW to 10 GW overseas. It also aims to hit 25 GW by 2028. That’s massive.
The thing is, these growth needs heavy capex. While net profits are up, its free cash flow turned negative — from S$1 billion in 2022 to negative $180 million last year.
A large part of its earnings is reinvested into its growth segment.
Last year, net profits from both renewables and urban solutions were hit by curtailments in China and changes to pricing. And also because of the China slowdown.
Indeed there are some bright spots, since the largest gross renewable capacity will come from India. But this is a long-term game.
Sembcorp Industries dividends weighed by heavy leverage
Debt has also increased. Total debt sits at $8.6 billion, which puts debt-to-equity ratio at 1.53x. I’m not too worried today.
But it is concerning when the company is going to pump the accelerator on growth overseas, especially when the Fed maintains its delayed interest rate cuts.
Sembcorp’s dividends are a mixed bag
Last year, Sembcorp raised its dividends to S$0.23 per share. That’s a 3.6% dividend yield. And it maintained a healthy 40% payout ratio. While management has committed to rewarding shareholders without overstretching its balance sheet, we have to understand Sembcorp’s dividend history is a mixed bag.
Over the past ten years, like other Singapore blue-chip dividend payouts were lumpy, with cuts during downturns and spikes during upcycles.
My Final Thoughts on Sembcorp Industries
Will shares continue to go up? Well, at current shares of S$6.35, I expect growth will come from its clean energy business. However, revenues and net profits from its renewables and urban solutions are still a small portion. Earnings power still comes from its gas services in Singapore, which provides investors their chunk of dividends.
In 2024, we saw curtailments in China, and pricing pressures due to a China slowdown. This could potentially delay Sembcorp’s renewable projects overseas.
Last time, it made good sense to put Sembcorp Industries Ltd in your core holdings of a broader dividend portfolio. Today, I’d re-think again.
At 3.6% dividend yield, Sembcorp Industries isn’t the “best in class” dividend payer. It still pays a viable income, but dividend yield growth will probably take longer to grow. This will be determined by future potential from its clean energy business.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
