What now for Sembcorp Industries after the energy market opens?

Analysts doubt it will dent earnings, as Sembcorp Power only contributed $3.4m-$4.4m to net profit.

Amidst threats of default and irrational competition as Singapore’s energy market liberalises, OCBC Investment Research said that Sembcorp Industries, one of the big players, is unlikely to be unaffected.

Analyst Low Pei Han noted that SCI retails electricity to contestable customers. “With the liberalisation of the retail electricity market, this pool will increase as more of the noncontestable segment become contestable, but at the same time the industry will become more competitive with the entrance of more retailers,” she added.

In 2017, Singapore contributed $163.6m out of utilities’ segment net profit of $260.8m. Out of this $163.6m, energy accounted for $80.0m, water contributed $40.9m and on-site logistics & solid waste management accounted for $42.7m. Hence, Singapore’s energy business represented 30% of the group’s utilities core net profit; the Singapore energy business is further broken down into three business lines: Gas & Power, Merchant & Retail, Renewables & Environment.

OCBC previously calculated 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 a net profit of $3.4m to $4.4m per year between 2014 to 2016 – marginal compared to the group’s total net profit,” Low added.

She also said, “Though there is the possibility of irrational competition in the initial phase of market liberalisation 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, OCBC looks forward to the growth of the LNG power business for SCI, 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,” Low said.

The analyst also noted that under Gas and Power in Singapore, SCI imports natural gas from Indonesia which is supplied to major power generation and petrochemical companies. “In addition, the group has two gas-fired cogeneration plants on Jurong Island that provide power to the grid and steam to customers,” she added.