SembCorp Industries

[Choon]

Seems to me that public companies in trying to live up to their proclamations of being ESG responsible are destroying shareholder value -- handing over good assets to private companies that are not bound by ESG promises. 

A case of form over substance when the polluting asset continue to exist in the world. 

A case of monkey do monkey follow (especially by SWF-owned public companies) until this wave of ESG fervor becomes more rational.

[Ben]

It is perhaps an understatement to say that SCI transformation for the past few years has been spectacular.

1. It has managed to offload SCM, a big drag on its financial for the past few years and distribute its shares in specie.

2. It has embarked on the journey to transform its portfolio from Brown to Green. With the latest project at Oman, its renewable portfolio has grown to 9.8GW, almost achieving their target of 10GW by 2025. It was only 2.6GW in 2020. Certainly, there are more upside in this area going forward. They are on the right trend, more renewable means more sustainable and possibly better profitability.

3. It has changed a few CEOs during this period to make the transformation happens.

SCI trades at less than 10x FY23 forward PE. I think it is considered “cheap” to me.

I remembered attending their AGM during those years before Covid and encountered many disgruntled SHs who blast the company of its underperformance. I personally heard many said they planned to sell no matter what, even though the price then was around $2. I am glad I hold steadfastly.

This company is perhaps another example that we need to be patience to let the management do their works.

[Choon]

It is perhaps an understatement to say that SCI transformation for the past few years has been spectacular.

1. It has managed to offload SCM, a big drag on its financial for the past few years and distribute its shares in specie.

2. It has embarked on the journey to transform its portfolio from Brown to Green.  With the latest project at Oman, its renewable portfolio has grown to 9.8GW, almost achieving their target of 10GW by 2025. It was only 2.6GW in 2020. Certainly, there are more upside in this area going forward. They are on the right trend, more renewable means more sustainable and possibly better profitability.

3. It has changed a few CEOs during this period to make the transformation happens.

SCI trades at less than 10x FY23 forward PE. I think it is considered “cheap” to me.

I remembered attending their AGM during those years before Covid and encountered many disgruntled SHs who blast the company of its underperformance. I personally heard many said they planned to sell no matter what, even though the price then was around $2. I am glad I hold steadfastly.

This company is perhaps another example that we need to be patience to let the management do their works.

Based on points (1) to (3), is the transformation really 'spectacular'. Spectacular denotes a vast improvement. I think that "important/big changes have been made" would be a more fair description. Whether these changes improves the underlying economic characteristics / DNA of the company, I think that remains to be seen.

I thought(1) to (3) are simply corporate actions that can be made at the discretion of a major shareholder. And maybe 'brown' to 'green' is more cosmetic than anything else.

Has SCI acquired new enduring qualities e.g. become more price competitive, e.g. become more operationally efficient, e.g. acquired capability in a new business line, e.g. foray into development of airport industrial parks, e.g. become the strategic partner of choice for Cainiao?

If SCI had built new qualities that improve its economic DNA, I think that deserves a 'spectacular' label.

I do not follow SCI actively, but could the recent good performance be due to high energy prices than anything else?

[Ben]

Lets look back at the things they have done in the past 3 to 4 years. They have managed to offload SCM, they have divested non-core assets, they have made meaningful inroads into renewable etc.

I do not think any of these things can be easily executed. To do all these things within a few years requires focus and determination, and not just at the discretion of a major shareholder, thought the willingness of that major shareholder is crucial. Along the way, they have to change CEO which I would like to think each CEO was specially bought in to complete certain tasks he is good at.

Can SCI complete all those that they have done plus those things you mentioned in the past 3 to 4 years? I am not sure as I do not know how complex it is.

Take the metaphor of a fat guy aiming to achieve normal weight and also to build up his body to be good enough to take part in Mr Universal body contest. First, it will take time to shed those extra body fats, and after achieving that, build up muscle to the body. All these take times and probably have to do it step by step to avoid hurting the body. If the fat guy is not successful in shedding the extra fats, then to take part in Mr Universal is just empty talk.

[specuvestor]

I think SCI has improved better than I had expected under the new CEO. I had a sense the previous angmo CFO is pretty clueless, and the oil & gas management is obvious when compared to Keppel, so anecdotally I think the management quality has improved.

That said it's a utility trading 1.8X book with much improved cash flow and balance sheet. I think the transformation story can continue for a bit longer but VB should consider what is fair value

Demerger accounting cost of S$970m for full year and still paying 4cts final

Now that spin off is ex and market is closed, I would think SCI should trade closer to a utility company if it can progressively increase its dividend coupled with paying down its debt for next few years as interest rate environment remains low, though management quality might not be top notch

[specuvestor]

Another divestment in the works

Sembcorp Industries Ltd., a Singaporean energy company backed by state-owned investor Temasek Holdings Pte, is considering selling its waste management unit, according to people with knowledge of the matter.
The company is working with a financial adviser on the potential divestment of SembWaste Pte and could seek as much as $700 million for the unit, the people said. Other investment firms and companies in the industry have shown interest in the business, the people said, asking not to be identified as the process is private.
Deliberations are ongoing and Sembcorp may decide against proceeding with a deal, the people said. A representative for Sembcorp didn’t immediately respond to requests for comment.
SembWaste is an environmental services provider of waste management, public cleaning and recycling services, according to Sembcorp’s website. The company agreed to buy Veolia Environnement SA’s Singapore environmental services arm and public cleaning business for about S$28 million ($21 million) in 2020, according to a statement.

[Ben]

While I don’t have a grasp of how much SembWaste is worth, $700M seems like a pretty high valuation for a waste management company.

Anyhow, the transformation story continues. It shows the resolve of the company to transform and divest non-core businesses.

As the company becomes less of a conglomerate, its enterprise value becomes higher.

Will SCI one day also consider spinning off its urban development unit? If it happens, at what price? More than a billion?

[weijian]

I thought this is a great sale as it deleverages the balance sheet as interest rates start to rise. More importantly, it removes a potentially risk asset. Most people think utilities/infrastructure are stable risk-less assets but this treatment can only be readily applied when the asset are in developed countries that apply/respect/follow the rule of law.

Proposed Sale of Shareholding in Sembcorp Energy India Limited

• Base Purchase Price: The consideration for the SEIL Sale Shares payable by the Purchaser to SCU is INR117,338 million
(approximately S$2,059 million1). The Base Purchase Price is 1.0x of the SEIL book value as of 30 June 2022

• Final Purchase Price: The Base Purchase Price is subject to certain adjustments3 on and after the date of completion under the Share Purchase Agreement

https://links.sgx.com/FileOpen/Proposed%...eID=730870

This divestment that was announced ~1.5years back, seems to have amply demonstrated the realization of FX translation losses into real losses.

(1) To recap, SembCorp sold its 100% owned Indian asset at ~BV back then. The gains would fluctuate based on its actual BV at the point when it is sold. At that time, based on the latest 1H22 balance sheet numbers, the estimated gain would be ~55mil to be recognized to P/L.

(2) Unfortunately, the rupee had a sharp ~10% depreciation against SGD from the end of FY22. From the movement recorded at the "change in equity", the entire gain from equity for the asset would be 290mil. But unfortunately after the sharp depreciation, an entire currency translation loss of 423mil alone for the asset was recognized. As such, from a 55mil gain as announced/expected, it was reversed by 290-423=-133mil of realized losses and that eventually turned 55mil gain into 55-133=-78mil of losses when it completed the transaction.

SEMBCORP INDUSTRIES’ TWENTY-SIXTH ANNUAL GENERAL MEETING –RESPONSES TO QUESTIONS FROM SHAREHOLDERS AND SECURITIES INVESTORS ASSOCIATION (SINGAPORE)

With the disposal of Sembcorp Energy India Limited and its subsidiaries (“SEIL”) completed in January 2023, the group recognised net loss of $(78) million. The loss on disposal of $(78) million was after realisation of an accumulated currency translation loss recognised in the foreign currency translation reserve of $(423) million and a gain in capital reserve and other reserves of $290 million. Before realisation of these reserves, the sale was a gain of $55 million (page 223).

In fact, the foreign currency translation reserve still stands at $(672) million as at 31 December 2023 (2022: $(957) million), even after eliminating the $(423) million associated with SEIL.

https://links.sgx.com/FileOpen/Sembcorp%...eID=797409