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.

Is M1's 19 cent dividend sustainable? Part 2

Following my previous post here, let's attempt to go further down the road and see the impact of the 4th telco to M1.

	FY2014	FY2015	FY2016	FY2017	FY2018
	Actual	Just my guess		4th telco	Pressure
EPS (cents)	18.8	19.9	21.1	21.9	22.3
Growth	8%	6%	6%	4%	2%
Scenario 1 (80% payout)
Regular payout/share(cents)	18.9	15.9	16.2	17.5	17.8
Payout ratio	101%	80%
Dividend Yield (@ $3.20)		4.97%	5.07%	5.48%	5.58%
Scenario 2 (85% payout)
Regular payout/share(cents)	18.9	16.9	17.3	18.6	19.0
Payout ratio	101%	85%
Dividend Yield (@ $3.20)		5.28%	5.39%	5.82%	5.92%
Scenario 3 (90% payout)
Regular payout/share(cents)	18.9	17.9	18.3	19.7	20.1
Payout ratio	101%	90%
Dividend Yield (@ $3.20)		5.60%	5.71%	6.16%	6.27%
Scenario 4 (95% payout)
Regular payout/share(cents)	18.9	18.9	19.3	20.8	21.2
Payout ratio	101%	95%
Dividend Yield (@ $3.20)		5.90%	6.03%	6.50%	6.62%

Growth assumption

I've assumed FY2015 and 2016 growth to maintain at 6% mainly due to growth from their fixed lines (fibre plans).

Although the 4th Telco is expected to enter during 2017, I've expected there to be little to no significant change in the market share of the incumbent. After all, the incumbents would be trying their best to create customer stickiness in these few years.

However, I expect M1 to lower their prices to defend their market share in 2017. Let's just call it an early defence; hence a 4% growth in FY2017.

FY2018, although I really don't expect the new entrant to make significant impact yet, I've decided to be conservative and lowered M1's growth.

Dividends

To be very conservative, I've assumed that M1 pays no special dividends in the scenario above.

I've also assumed that management will scale down their payout ratio to create a buffer for the great war they've to fight in 2017/2018. However, I expect them to minimally maintain the absolute dividend per share amount, drawing reference to their past track record.

New revenue driver? (not factored in the growth above)

M1 has announced that it will be launching a handy payment service for small businesses (like push carts and small merchants) which is essentially M1's own version of a POS (Point-of-Sale) service.

Remember those clunky devices for credit card payments? Yes it is that!

Want to know why M1's version looks so much more appealing?

1. It is only the size of a deck of card. 
2. It doesn't require a telephone line. You just plug in the audio jack of any Android or iOS smart devices
3. It runs on M1's data plan instead of connecting to loonnngg wires.
4. Rental is one-tenth of the usual ($5.35/month).
5. No minimum transaction nor deposit required! (WOAH)

Is M1 going to disrupt the traditional POS system? I don't know. But this sure sound interesting. If I'm a business, I'm definitely checking this out.

MiBox
Seriously though, are they re-looking at this or not? This could be the next set up box that taps on the hype with HULU, NETFLIX and many more. They could very easily disrupt the current pay-TV scene.

Is M1's 19 cent dividend sustainable?

Great M1 Bear?
M1 has been on huge selling pressure lately due to the anticipation of the 4th telco entering the Singapore market once IDA announces so.

Price has declined from a high of $3.90 to $3.20 (18% drop). At a closing price of $3.20 (trough), this translates to a yummylicious dividend yield of 5.9%.

Is 19 cents per share of dividends sustainable? Let me attempt to analyse below (I may be incorrect).

(S$m)	FY2010	FY2011	FY2012	FY2013	FY2014
EPS (cents)	17.5	18.1	16.1	17.4	18.8
Growth		3%	-11%	8%	8%
Regular payout/share(cents)	14	14.5	12.9	13.9	18.9
Payout ratio	80%	80%	80%	80%	101%
Total dividend (include special Dividends)	17.5	14.5	14.6	21	18.9
Payout ratio	100%	80%	90%	120%	101%

M1's dividend policy is to pay out at least 80% of its earnings. We can see this from its regular dividend payout for the past five years.

Note also that during FY2010, 2012 and 2013 there were special dividends being paid, bringing the total payout ratio higher than the 80% guidance.

Moving forward?

Q1 FY2015, M1's earnings rose 6.6% YOY. Management has guided that the full year results to be "moderate"; suggesting in a mid to high single digit growth.

	FY2014	FY2015	FY2015
	Actual	Just my guess
EPS (cents)	18.8	19.9	20.3
Growth	8%	6%	8%
Scenario 1 (80% payout)
Regular payout/share(cents)	18.9	15.9	16.2
Payout ratio	101%	80%
Dividend Yield (@ $3.20)		4.97%	5.07%
Scenario 2 (85% payout)
Regular payout/share(cents)	18.9	16.9	17.3
Payout ratio	101%	85%
Dividend Yield (@ $3.20)		5.28%	5.39%
Scenario 3 (90% payout)
Regular payout/share(cents)	18.9	17.9	18.3
Payout ratio	101%	90%
Dividend Yield (@ $3.20)		5.60%	5.71%
Scenario 4 (95% payout)
Regular payout/share(cents)	18.9	18.9	19.3
Payout ratio	101%	95%
Dividend Yield (@ $3.20)		5.90%	6.03%

I'm assuming no special dividends in FY2015. Is the yield yummy enough for you? 

Some may be afraid of its future earnings. Note that M1's earnings up until FY 2017 will not be impacted by the 4th telco, and I expect it to grow at least 5% YOY. This means dividends will grow as well.

What do you think?