Published August 15, 2008

Sembcorp: potential versus delivery

By VINCENT WEE
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FOR many years, leading local conglomerates Keppel Corp and Sembcorp Industries have been seen mainly as offshore and marine plays. While the sector still makes up the bulk of their revenue, a key difference is emerging in where the remaining portion comes from - which in turn is changing the revenue composition and the ensuing growth potential of the respective groups.

The perennial rivalry between the offshore arms of both means that they are almost neck and neck in terms of orders, although Keppel's full ownership of its Keppel Offshore and Marine subsidiary means it recognises all the revenue while Sembcorp has only a 60.9 per cent share of Sembcorp Marine. If the marine revenue is excluded from consideration, it soon becomes obvious that the next area of competition is in the infrastructure sector.

In the most recent first-half results, infrastructure made up 23 per cent of Keppel's revenue, rising more than three times to $1.1 billion, albeit from a relatively low base of $347 million previously. Sembcorp, meanwhile, attributed 47 per cent of turnover to its utilities operations and this rose 35 per cent to $2.2 billion from $1.7 billion.

There are some differences in the definitions of the respective divisions. Keppel's infrastructure division, for example, is divided into environmental engineering, power generation and logistics and network engineering, while Sembcorp's is simply broken up into energy and water.

While the list of projects each has is broadly similar, Semb- corp's greater proportion of (as well as amount of) revenue that comes from utilities suggests that if one were betting on energy and water infrastructure players, it is the purer play, especially in terms of the waste water industry. In the first half, about 40 per cent of profit and nearly half of revenue came from utilities. Keppel, in contrast, had just 5 per cent of profit and 23 per cent of revenue from its infrastructure division. While this is more than its property business, this has been relatively recent in the last half when property revenue plunged 40 per cent.

Looking ahead to future earnings, judging by the respective groups' growth plans in their second-quarter results presentations, Keppel remains firmly entrenched in its property-driven model while Sembcorp is clearly banking on the water solutions market. The latter has even set an earnings target of $40-50 million from water by 2013.

Although it seems that Keppel and Sembcorp are evolving into different animals, some of their characteristics remain. Somehow, Sembcorp just cannot seem to keep its nose clean. While first-half utilities revenue rose a healthy 35 per cent, profit dropped 20 per cent as what management called 'teething problems' at its various new projects did not produce the expected performance. Meanwhile Keppel's Merlimau cogen plant, which started up in the first half of last year, is already running at nearly full capacity and contributed significantly to a near tripling of infrastructure revenue.

With memories of the forex debacle at its Sembcorp Marine subsidiary still fresh in investors' minds, underperformance of any sort will continue to try their patience. Sembcorp's water strategy for future profits looks like a smooth-flowing one on paper. Management just needs to deliver on the potential.