Sembcorp Industries - OCBC Investment 2018-03-22: Electricity Retail A Small Part Of Portfolio

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SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Electricity Retail A Small Part Of Portfolio

• Liberalisation of SG retail elec mkt.
• Sembcorp Power ~S$3-4m/yr.
• Marginal compared to total net profit.

SG energy business accounts for 30% of utilities core net profit 

• With further liberalisation of Singapore’s retail electricity market, there have been questions on the impact on utilities players such as Sembcorp Industries (SCI). 
• First, we note that SCI’s Singapore energy business is broken down into three business lines:
  1. Gas & Power,
  2. Merchant & Retail,
  3. Renewables & Environment.

Electricity retail just a small part of SG energy business 

• Under 'Gas and Power' in Singapore, Sembcorp Industries (SCI) imports natural gas from Indonesia which is supplied to major power generation and petrochemical companies. In addition, the group has two gas-fired co-generation plants on Jurong Island that provide power to the grid and steam to customers. 
• For 'Merchant & Retail', Sembcorp Industries (SCI) retails electricity to contestable customers, and with the liberalization of the retail electricity market, this pool will increase as more of the non-contestable segment become contestable, but at the same time the industry will become more competitive with the entrance of more retailers. 
• Under 'Renewables & Environment', Sembcorp Industries (SCI) provides water and wastewater treatment, has an energy-from-waste facility in Singapore and is looking to enhance its solar power capabilities.  We had earlier estimated that retail electricity sales does not constitute a large part of the Singapore energy business. Indeed, further digging revealed that Sembcorp Power Pte Ltd reported net profit of S$3.4m to S$4.4m per year between 2014 to 2016 – marginal compared to the group’s total net profit.

Look forward to growth of LNG power business 

• Though there is the possibility of irrational competition in the initial phase of market liberalization as well as promotional spending required which could pressure margins, the Singapore retail electricity business is just a segment of the group’s diverse portfolio that spans sectors and geographies. 
• Meanwhile, we look forward to the growth of the LNG power business for Sembcorp Industries, as well as renewables for the longer term. The group has a global scalable operating model, and is well-positioned to implement its new strategy to achieve double-digit ROE in five years. 
• Our Fair Value remains unchanged at S$3.59. Maintain BUY. 

Low Pei Han CFA OCBC Investment | http://www.iocbc.com/ 2018-03-22

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 3.590 Same 3.590