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SembCorp Industries: "A safe price of entry."

Friday, October 10, 2014

A reader, Dexter Choo, asked me how did I value SembCorp Industries and determine a "safe price of entry"? Before I go on, I must establish that if we believe that valuation exercises are subjective and this is something I have blogged about many times before, then, it follows that "safety" is also relative.

So, with that in mind, I am going to share in this blog my approach in this instance. Now, please note that I am not saying that this is the right or best approach. It is simply something that makes sense to me and that I am comfortable with. After all, what we do should have a strong connection to our motivations.

For a while now, in view of rising interest rates in the not too distant future, I have been looking to increase my investment in companies which:

1. Are net cash or have very low net gearing.
2. Are able to generate stable earnings.
3. Pay out a good portion of earnings as dividends.



If we look at SembCorp Industries' numbers for the 5 years to 2013, we see that it is generally a net cash company which generates stable earnings. It is also a company with growing NAV/share from $1.86 in 2009 to $2.93 in 2013. Now, as an income investor, the fact that they also pay consistent and meaningful dividends of at least 15c a share (DPS) is important to me.

Now that we have some numbers, we might ask what would be a sensible price to pay for the stock? Depending on the valuation technique we use, we would get different answers.

Personally, in this case, I use a very simple metric, PE ratio (TTM). This looks at the price of the stock today and the earnings in the last 12 months. I might also discount earnings a bit to be more conservative but if by annualising the earnings in the last 6 months I would get a more conservative estimate anyway, I would use that. So, what is a reasonable PE ratio for SembCorp Industries?

Given more normalised circumstances without considering the effect of the Global Financial Crisis in 2008 and the Fiscal Cliff panic in 2011, Mr. Market seems quite happy to pay a price that has a PE ratio of about 11.4x to 13.6x for SembCorp Industries.



Based on an estimated 40c EPS for 2014 and my entry price of $5.04 a share, I got in at an estimated PE ratio of 12.6x. Is it undervalued? Not by a long shot, I don't think so. Then, why did I buy?

Well, apart from the fact that it ticked all my boxes, I reminded myself of an idea by Warren Buffett:

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

A buy price of $5.04 a share is not fantastic but I believe that it is fair enough.

As an investor, I am also informed by Technical Analysis (TA) which tells me that what price Mr. Market is willing to pay often has to do with sentiments and not fundamentals. So, I also look at charts in an effort to time my entries at prices more reasonable. Of course, we have to remember that TA is about probabilities and not certainties. So, there is no guarantee that prices would not go lower.

I will end by saying that there could always be "safer" prices at which to buy a stock. So, buying SembCorp Industries' stock at the depths of the Global Financial Crisis, for example, at a PE ratio of 7x would have been much safer but that is all I dare to say.

Related posts:
1. When to BUY, HOLD or SELL?
2. SembCorp Industries: A nibble.

30 comments:

RayNg said...

Previously warren Buffet only buy severely under value good company.

AK now you move up one step to match with Warren Buffet;

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Only people has sizeble investable fund think like that. Why? Because they have holder power.

AK71 said...

Hi Ray,

Aiyoh, dun liddat say leh. -.-"

Actually, if we think about it, there is great wisdom in Buffett's idea. If we bought a wonderful company, even if it wasn't undervalued, we could probably hold on for years and years and not worry about the company going kaput. Of course, an important criterion I have as an income investor is that it must pay meaningful dividends.

Peace of mind is priceless. ;p

Dividend Warrior said...

Hi AK,

I have also added Semb Corp recently. Let's prosper together.^^

AK71 said...

Hi DW,

Et tu? haha... ;p

Long time no "see". Good to hear from you again. :)

Felix Leong said...

very good read, I too believe that semb corp industries is great company and have bought some today at $5.02
Cheers ^^

Solace said...

my view on PE valuation are listed on "AK ASSI exchange" catalist board

http://singaporeanstocksinvestor.blogspot.sg/2013/09/tea-with-solace-valuation-per-and-value_12.html

others approximate valuation to use for certain companies include

heavily geared companies: EV/EBITDA

companies which have a negative cash conversion cycle: use FCF yield

property companies: use NAV or RNAV

asset-heavy companies: use P/B

Firms with highly variable earning: P/S

Then still got things like PEG, Cash return, Earning yield, Discounted cash flow......

are you confused? i think i am. haha

Better don't 走火入魔 LOL

AK71 said...

Hi Felix,

You got in at a better price than I did. Congratulations! ;)

AK71 said...

Hi Solace,

That was a really good 2 parts guest blog you did. I am going to provide the hyperlinks for readers to click on:

Tea with Solace: Valuation, PER and value trap (Part 1).

Tea with Solace: Valuation, PER and value trap (Part 2).

ASSI catalist board. LOL. Maybe should call ASSI NASDAQ. More pomp! ;p

jalan Jalan said...

Hello AK,

May I know did you get the historical PE of Sembcorp? Did you use any specific tools? Thanks!

AK71 said...

Hi Jalan,

Oh, nothing mysterious at all. We just need stock prices and earnings to calculate PE ratios.

So, just look at the EPS for 2012 and 2013, in this case, and the highest and lowest the stock price hit in those years and we will have the PE ratios.

I wasn't very rigorous. Just simple estimates. ;)

Felix Leong said...

Semb Corp Industries currently trading at around 11 times trailing earnings with a dividend yield of 3%, along with a solid balance sheet of net cash position. I think its Utility business is pretty defensive and also generates a high return of equity of 19%! I'm confident that this area would continue to grow especially its overseas projects in China, India and Middle East where there's very strong demand for energy.

I definitely think that Semb Corp Ind is severely undervalued for such a strong and solid blue chip as the market currently values its Marine business at 13 times earnings and its Utility business at only 10 times earnings!

Its Utility business is still in the growth stage as seen by the pipeline of mega projects, but in the next few years to come management could unlock tremendous value by listing the Utility business like how they did for Semb Marine, it would easily fetch 15 times earnings or more, given comparable listed utilities companies such as SP Ausnet, City Spring Infrastructure & K-Green Trust, all of which trades at much over 15 times earnings.

AK71 said...

Hi Felix,

Thanks for the very good analysis on the utilities business which I am still reading up on. Much appreciated. :)

Now, I feel like throwing in everything including the kitchen sink. LOL. ;p

dexter choo said...

alright thanks so much AK71 on your detailed reply! really appreciate the effort you have put in. Do continue writing such insightful and great articles! :)

AK71 said...

Hi Dexter,

If a job is worth doing, it is worth doing well. Otherwise, I won't bother. ;p

Hope you don't get tired of hearing me talking to myself. -.-"

boonchin.ng said...

Hi AK, SembInd below $5, and KepCorp looks like going below $10 anytime soon ... Can prepare to load more SembInd and initial long position in KepCorp? What's your "bowling" ball telling you? :)

AK71 said...

Hi boonchin,

I like SembCorp Ind more than KepCorp largely because the latter derives a quarter of its revenue from property related businesses. I rather think that local developers will continue to have a hard time. So, it could in the next couple of years be a drag on results to have exposure to them.

From the charts, it looks like selling pressure could intensify for KepCorp's stock. $9.55, $9.26, $9.04 or event $8.81? I don't know but it isn't over until it is over.

As for SembCorp Ind, the charts look more benign. Immediate support is at $4.92. Could we see $4.84, $4.78 or even $4.72? Again, it isn't over until it is over.

Good luck to us all. ;)

AK71 said...

"Sembcorp Industries is our top big-cap pick as its recurring utilities earnings and upcoming new power projects. It is also less susceptible to oil price movements relative to SMM and KEP.

"We believe the market may not have priced in India’s contribution and the potential of bottoming power prices in Singapore as new capacities are significantly completed by 1H14. We see catalysts from the start-up of its first 660MW boiler in India by end-14."

By Lim Siew Khee & Yeo Zhi Bin, CIMB.

fenix said...

Just added some at $4.86. Very long holding.

AK71 said...

Hi fenix,

I like your entry price much more than mine. ;)

AK71 said...

Sembcorp Industries (Sembcorp) opened its second cogeneration plant, Sembcorp Cogen @ Banyan - a S$635-million facility with the gross capacity to generate 400 megawatts of power and 200 tonnes per hour of process steam - on Friday (Oct 31).

The plant, which commenced commercial operations at the beginning of the month, generates electricity and steam for industrial companies on Jurong Island. It increases Sembcorp's combined gross power generating capacity in Singapore by 50 per cent to 1,215 megawatts, while enhances the flexibility and reliability of the company's power and steam supply.


Source:
http://www.channelnewsasia.com/news/business/singapore/sembcorp-opens-new-power/1445336.html

oradba168 said...

Has just done @ 4.16 =p

AK71 said...

Hi oradba,

That is a very good price. If I weren't already vested, I would nibble at that price too. ;)

boonchin.ng said...

I nibbled some SCI last week @ 4.10 ... Still waiting the moment to gobbles ;)

AK71 said...

Hi boonchin,

That is a great entry price. :)

If price should go down, buy again. If price should go up more from here, you are already a winner.

Either way, you win. ;)

boonchin.ng said...

Hi AK,

I nibbled at 4.6, 4.15, and 4.1 respectively. Though were small bites, but not cheap ... Think should save my appetite for the real gobbles ;)

By the way, which companies in your opinion will benefit from U.S economy recovery and strengthen of the U.S dollar, yet is simple business and payout decent dividend? I think STEngg will benefit from U.S improved situation but is not simple. While Vicom is simple with decent dividend but unlikely to benefit much from U.S recovery ...


What do you see in your "bowling ball"? :)

AK71 said...

Hi boonchin,

I haven't been bowling lately. LOL.

I am also keeping an eye on ST Engineering which is very close to my last purchase price. No incentive to buy more.

As for SCI, my last purchase price was $4.14. That was a nibble too and I commented not too long ago that I won't be nibbling anymore.

I am now waiting to gobble if prices should go much lower. ;p

oradba168 said...

AK71,

Any comment on the Keppel Corp is going to privatize the Keppel Land ?

AK71 said...

Hi oradba168,

OK, I will do a short blog post on this. Look out for it. ;)

Cool Planet said...

Hi Ak,

Recently sci keep dropping, should we hold or sell? What is your advice?
Thank you.

AK71 said...

Hi Cool Planet,

As usual, I have no advice to give anyone. I am only talking to myself. ;)

I sold some of my investment in SCI when its share price bounced back some months ago and I blogged about it, if you remember.

I am still holding on to my remaining long position because I believe that the price is now at a level which I wouldn't sell at but given the negative sentiments surrounding the stock, I might wait a little to see if I could add at a lower price. :)

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