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SembCorp Industries: A nibble.

Wednesday, October 8, 2014

Today, a reader asked if I was interested in SembCorp Industries since I bought into SembCorp Marine recently. Answer? Yes, I am interested and I have been looking at it for a few days.


SembCorp Industries' share price has not suffered as dramatic a decline compared to SembCorp Marine's. I think it would be correct to say that it is less volatile. If we think about it a bit more, this is quite natural since they are a conglomerate and have an interest in other businesses such as utilities which probably helps to cushion their earnings.

Here are some numbers:

Click to enlarge.

So, in line with my effort to increase the proportion of companies in my portfolio which are net cash and which pay consistent dividends, I decided to take a nibble at $5.04 a share as the stock price hit a low of $5.03 today.

With 1H 2014 EPS at 20.1c, expectation for a full year EPS of 40c is reasonable. This gives a PE ratio of 12.6x which seems reasonable. Well, it is definitely more attractive than in July this year when it was trading at a PE ratio of about 13.75x when the stock was about $5.50 a share.

Assuming a dividend per share of 15c, it would give us a dividend yield of 2.98% which doesn't seem as attractive as SembCorp Marine's but I reminded myself that this is based on a lower assumed payout ratio of 37.5% and not 50%.



Could we see the stock price going lower in the near future? We could possibly see $4.99 a share but because momentum oscillators such as the MACD and the CMF did not form lower lows as the stock price formed a lower low, I feel that selling pressure in the near term has somewhat abated.

About SembCorp Industries:
Sembcorp Industries is a leading energy, water and marine group operating across six continents worldwide. With facilities of over 7,200 megawatts of gross power capacity and over eight million cubic metres of water per day in operation and under development, Sembcorp is a trusted provider of essential energy and water solutions to both industrial and municipal customers. It is also a world leader in marine and offshore engineering, as well as an established brand name in urban development. The Group has total assets of over S$14 billion and employs approximately 10,000 employees. 

See Press Release: here.

Related post:
SembCorp Marine: A nibble.

24 comments:

qinzheng said...

Hi AK,

Faster we need your support! Lol
I'm sitting on a great paper lost for both sembmar n sembcorp. :(

Solace said...

The utilities business has been growing in recent years and recently has over taken the off shore and marine as the biggest contributor to its bottom line.

I believe utilities will remain to be the important earning contributing to sembcorp group. I project this segment to be steady, with not too much of fluctuation in earnings.

The urban development segment can be potential growth driver if it shines. However, i find harder to value and predict the performance of this urbanization play.

The last time i used sums of the parts valuation to derive a value of about $5.60.

My personal preference is to give about 15% discount to this valuation before i take a bite. Of course, my valuation can be subjective and the stock might not reach that value haha.




AK71 said...

Hi qinzheng,

To be honest, I do not think that my entry price is cheap although I feel that it is fair enough.

I take comfort in the saying by Warren Buffett that it is better to pay a fair price for a wonderful company than a wonderful price for a fair company. ;p

AK71 said...

Hi Solace,

I took a look at the utilities business and it is impressive. For sure, the need for utilities is enduring and I share your belief that this business will be a stable contributor to earnings.

I would actually like to buy at $4.80 or so which is where I see stronger support. However, with the positive divergence between price and momentum oscillators, I decided to get some at $5.04 which is fair enough for a start. ;p

Felix Leong said...

very good read, keep it up

AK71 said...

Hi Felix,

I am just talking to myself, as usual. ;p

Keep it up? Er, I will have to try to keep my volume down because there are neighbours who would complain from time to time. -.-"

Sillyinvestor said...

Was reading up on sembcorp industries ARs.

Sembcorp used to give very high payout ratio, close to 100% sometime above 100% many years ago, can't remember now, in the year 2000??

SO, if they do not need the money for growth anymore, we can assume that the payout ratio should get better since the biggest shareholder is "ah gong", who will want to see money flow back upwards,if there is no active allocation of resources.

I see a niche/moat in the synergy of their business, urban development goes hand in hand with utilities provision and in places like China, perhaps also water treatment.

However, this "niche" could also be the factor why payout ratio is lower as it is a highly capital intensive business.

Did not read in details and didn't do the number crunching yet. Because as you mentioned, the yield is just too low now, maybe a better price will motivate me better. LOL

AK71 said...

Hi Mike,

If Mr. Market should offer meaningfully lower prices, everything else remaining equal, I will most likely be accumulating. When would you like to join me?

Well, if SCI should increase its payout ratio to 75% like what ST Engineering is doing, the dividend yield would be much more attractive than what ST Engineering is offering now. ;p

Sillyinvestor said...

Hi AK,

you ask me when? I think my answer has to be my war chest, it is rather small now, I would like to save it together with my year end bonus.

I am done nibbling and is happy with my core portfolio now, any adding to it with have to be done either with next year dividends or when market gives a MOS of safety for fair price

I don't know what is it for Sembcorp, just reading all the strong bluechips ARs as fun read, to see if I can find a theme among the successful companies in Singapore, the Ah Gong Inc

So far, seems like size and integration matters a lot...

AK71 said...

Hi Mike,

Yes, size matters, I guess.

Not all my adventures into the land of the smaller caps have turned out well. Some have turned out to be misadventures. LOL.

Anyway, I should be less adventurous now in my old age. The heart is weaker now. ;p

dexter choo said...

hi, i have a few questions.Firstly, how would you value sembcorp industries to determine a safe price for entry?Secondly, would you consider this to be a value stock? And lastly for the payout ratio how did you come about with 50%? was it based on previous quarter?

AK71 said...

Hi Dexter,

Last night, I started writing a reply to you but it became so lengthy that I decided to blog about it. :)

I completed the blog post last night but couldn't keep myself awake enough to put in the finishing touches (e.g. photos) which I just did. So, this is for you:
SembCorp Industries: A safe price of entry.

:)

Daniel said...

hi ak, just a quick question.

You mention its all about income. what made you choose 3% income over other stocks who can give out better DPS % ? would love to hear your thoughts..

AK71 said...

Hi Daniel,

I don't know if you have read an earlier blog post of mine, Motivations and Methods in Investing.

I invest largely for income but I also invest for income and growth. SembCorp Industries would fall under the income and growth category. :)

Lazy Kat said...

4.690 now??

AK71 said...

Hi Kat,

I already have the level of exposure that I want. I would probably be interested to buy again at around $4.40 per share if it should happen. ;)

Solace said...

"The last time i used sums of the parts valuation to derive a value of about $5.60.

My personal preference is to give about 15% discount to this valuation before i take a bite. Of course, my valuation can be subjective and the stock might not reach that value haha."

Quote from my previous comments.

Stock price today has reached my targeted price, taken entry at $4.69.

Patient can be rewarded. Will join you to average down maybe at $4.40 haha

AK71 said...

Hi Solace,

Let us take this a step further and think of possibly paying 50c for what is worth $1. Based on your valuation, we should be very happy to throw in everything including the kitchen sink at $2.80 a share for a PE ratio of 7x. ;p

boonchin.ng said...

Hi AK,

Decided to nibble first @ $4.6, then only do my homework this weekend. Lol

Solace said...

Woah,

$2.80 .. Toilet bowl can throw in too haha.

But then if drop to that price, I hope not too many people will be jobless in the event of such down turn.

ivan chia said...

Hi ak,

Any thoughts on the rebound of sembcorp industries?

AK71 said...

Hi Ivan,

I don't know what Mr. Market is doing with prices most of the time. ;p

I know that I got in at what I thought was a fair price. I know that I bought again at prices I thought undervalued SCI, the lowest of my buy prices being $4.14.

I will wait and see what Mr. Market does next. :)

ivan chia said...

nice! i think the recent news would have helped (;

your blog definitely benefited me alot as a young adult, thanks so much!

Ivan

AK71 said...

Hi Ivan,

I am glad that listening to me talking to myself has been helpful to you. Just remember to use a filter. ;p

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