Published July 2, 2009

Sembcorp must get basics right as utilities player

By VINCENT WEE

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SEMBCORP has slowly and steadily been transforming itself into a serious utilities player over the past couple of years. More evidence of this was seen at the conclusion of last week's Singapore International Water Week as the conglomerate inked several deals to set itself up for future growth, particularly in the industrial waste water treatment space.

These include partnerships with various partners to test new technologies to treat industrial waste water as well as a deal with Shenyang city in China's Liaoning province to explore entering into a project for waste water treatment, in the process building on its presence in the city where it already has three water works facilities, water intake systems and a water distribution network.

The conglomerate sees potential in developing technologies to treat industrial waste water in particular because few companies have similar expertise and Sembcorp has a competitive advantage even though the market is smaller than that for municipal waste water treatment.

According to executive vice-president Tan Cheng Guan, the former comprises only about 10 per cent of the overall water market.

'Municipal is a very competitive market and we want to go into a market where we have more value add and can enjoy better margins,' said Mr Tan on the sidelines of the Water Week event.

Sembcorp is currently active in China, the UK and UAE, where it ultimately plans integrated utility facilities combining both water treatment and energy.

Key to Sembcorp's service offerings are competitive and technologically advanced water solutions. The industry is seen as big business. Expanding populations and rising demand for treating household and industrial waste water should see the market, worth an estimated US$152 billion in 2007, jump to US$235 billion in 2016.

Revenue from utilities as a whole has risen over the past five years from $2.5 billion in 2004 to $4.5 billion last year.

Ironically, however, its share of overall turnover and profit has been going down as the fortunes of the marine sector rose even faster over the period, coinciding with the rig building boom of the last two years.

In fact, in the most recently reported first quarter, utilities turnover plunged 38 per cent to $696.2 million while that from marine jumped by nearly half to $1.4 billion.

As a result, utilities revenue made up less than a third of overall revenue in the quarter.

The problem in the overall plan seems to be the energy side of the utilities equation. Sembcorp blamed Q1's poor results mainly on the drop in the high sulphur fuel oil (HSFO) rate and lower offsite power sales in the UK as a result of the expiry of certain favourable supply contracts. Difficulties with forex conversion losses compounded the problems in the UK operations.

Sembcorp's biggest hope seems to be in China, where it is slowly building up a solid portfolio of investments in providing services to industrial parks. These include in Shanghai, Nanjing, Zhangjiagang, Tianjin Lingang and Shenyang, where it has invested a total of over $320 million.

The model where it provides centralised utilities and services to multiple customers in energy-intensive industrial clusters such as chemical and petrochemical hubs is one that it has honed from its experience on Jurong Island in its home market and taken abroad.

Sembcorp needs to work on the scalable projects it has in hand and grow them. The utilities business has the potential to provide both long-term stability and growth potential which will come in useful to counter the more cyclical nature of the marine business.

However, in order to do that, it needs to get the fundamentals right.

Glitches every now and then with problems ranging from assets not performing to expectation to supply price and forex fluctuations are factors that investors will begin to tire of if they continue to recur too often.