Will Sembcorp Utilities arm ride out the storm?

Sembcorp Industries' Utilities arm Q1 2015 net profit dropped 19% Y-O-Y. Will Sembcorp Utilities ride out this storm?

What happened?
Utilities dropped 19% largely due to lower Singapore's contribution. Why? All because of the drop in "Vesting Contract Level" (VCL).

What is VCL?
Vesting Contract was introduced by EMA (Energy Market Authority) in 2004 to curb the abuse of market power by the leaders.

How does it work?
With Vesting, a percentage of the market's volume is sold on a fixed price.
In 2014, VCL was set at 40%, with the vesting price 31% premium to the spot price.

This meant that 40% of the Genco's revenue was recurring in nature, set at 31% above the spot price.

EMA dropped a bomb
At its biennial review, EMA will decrease the VCL from:
From 40% in 2014 
to 30% in 1H 2015
to 25% in 2H 2015
to 20% in 2016

Since Vesting price was about a third above the spot price, a decrease in VCL meant a drastic drop in revenue for the genco.

Singapore vs Overseas
Net profit between Singapore and overseas' utilities is about 50-50 in 2014. In Q1 2015, the tables have turned.

Q1 2015's quarterly result - Utilities

Concentrate on sowing seeds for the future
There's no doubt that the short term prospect for SCI looks bleak. With the situation in the local electricity scene and the abysmal order books in the Marine sector, there's little wonder why SCI's price have fallen so much.

After all, 2015's result is expected (and on the way) to be way below 2014's.

However, I always remind myself to focus on the fundamentals. Management, although aware of the current situation, is focused on the future.

Overseas Utilities is the hero

- from Sembcorp's website

India's total power capacity alone would dwarf Singapore's by 2017. Having a foot set in a power-hungry India bodes well for any future expansion there.

Continued push towards renewable energy

Management has shown that they're not resting on their laurels, relying on the traditional sources of energy. Sembcorp share of renewable energy output has grown from 5% a year ago to 15% now.

This equipped SCI to ride on the growth of the renewable energy sector.

The future
Whether these seeds will grow and succeed in the future awaits to be seen. At least now, I'm happy to know the management team behind SCI Utilities is working hard for its future pipeline projects.

Should you accumulate more now that it's near 52-weeks low?

I know I'm not about to be scared by this volatility and abandon this ship. I'm happy enough to retain my existing holdings and ride out this storm.