Sembcorp Industries

Sembcorp Industries | Buy

Fair value: S$3.59

March 22 close: S$3.09

OCBC Investment Research, March 22

With further liberalisation of Singapore's retail electricity market, there have been questions on the impact on utilities players such as Sembcorp Industries.

First, we note that Sembcorp's Singapore energy business is broken down into three business lines: gas and power, merchant and retail, and renewables and environment.

Under gas and power, Sembcorp 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 and retail, Sembcorp sells electricity to contestable customers, and with the liberalisation of the market, this pool will increase as more of the non-contestable segment becomes contestable, although at the same time the industry will become more competitive with the entrance of more retailers.

Under renewables and environment, Sembcorp provides water and wastewater treatment, has an energy-from-waste facility in Singapore and is looking to enhance its solar power capabilities. Retail electricity sales does not constitute a large part of the Singapore energy business. Sembcorp Power has reported net profit of S$3.4 million to S$4.4 million per year between 2014 to 2016, which is marginal compared to the group's total net profit.

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