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SembCorp Marine: A nibble.

Friday, October 3, 2014

Shareholders of Marco Polo Marine would remember that they ordered an oil rig from SembCorp Marine earlier this year. The value of the contract was about US$214 million. That is a lot of money. SembCorp Marine is a leader in the building of oil rigs, of course, and they have an impressive order book.

That led me to wonder if it might be a good idea to be a shareholder of SembCorp Marine too and benefit from Marco Polo Marine's purchase of the oil rig. Yes, I know. I am so greedy. Bad AK, bad AK!

SembCorp Marine was trading at about $4 to $4.20 a share back in February. The stock price was in a downtrend. (It still is.) Support was at around $3.90. The moving averages were all descending and the momentum oscillators were not supportive. (They still aren't.) So, there was a good chance that prices could go lower.

The many times tested support at $3.90 gave way eventually and, this morning, stock price hit a low of $3.54 a share. The CMF hinted that selling pressure has reduced. It could be that some short positions were being covered and it could be because this is the last trading day of the week.

Ahead of a long weekend, short sellers might think it safer to close their positions. Selling could resume next week or it might not. So, with share price more than 10% lower than it was in February, I wondered if I should wait a bit more or buy this morning?

I took a look at some numbers:

From a valuation perspective, the stock is more reasonably priced now. In April 2011, when it touched a high of $6 a share, it was trading at a PE ratio of 16.66x. Pretty high. Mr Market obviously expected better earnings to come but better earnings did not come.

Today, share price touched a low of $3.54 in the morning. At that price, assuming an EPS of 24c, annualising 1H 2014's figures, we are looking at a PE ratio of 14.75x. This would seem like a fairer valuation although still not cheap.

If we believe that oil is still going to be an important energy source in the world and if we believe that any weakness in oil prices is temporary, then, weakness in the share prices of rig builders with good track records like SembCorp Marine presents an opportunity to get in at more reasonable valuations.

As I like to be paid while I wait, I looked at the dividend payout record of SembCorp Marine:

It seems to me that SembCorp Marine normally pays out about 50% of their earnings as dividends to shareholders and more during good years with better earnings. An 11c to 13c DPS would mean a dividend yield of 3.1% to 3.67%, given an entry price of $3.54 a share. As an investment for growth and income, I feel that this is pretty decent.

So, although a PE ratio of 14.75x  does not look cheap, I decided to initiate a long position this morning at $3.56 a share. A nibble, so to speak. Didn't throw in too much and definitely not the kitchen sink. Continuing weakness could see gap cover happening at $3.30 and for people who believe that gaps will eventually be covered, it could be worth waiting a bit more.

What would I do if price should test $3.30? I would probably be buying more.

Related post:
Marco Polo Marine: Drilling for higher income.


AK71 said...

The depressed energy prices have prompted concerns of spillover effects to Singapore offshore and marine industry and that industry players would begin cutting back activity.

However, analysts Channel NewsAsia spoke to were positive that as long as Brent Oil held close to US$90 per barrel, deep water activity would remain profitable. And this would help to curb the fallout on Singapore rig builders Keppel and Sembcorp.

Said Mr Low Pei Han, an investment analyst at OCBC Investment Research: "They are still spending, specialising in the rigs that are in demand but they are also impacted by the broad macro trends, such as oil prices sliding as of late. However, we see that as long as oil prices remain above 75 to 80 dollars per barrel. We see that deep water projects should still continue."

Keppel and Sembcorp are among the world's leading rig builders and they have strong order books. Keppel currently has a net order book of S$14.1 billion, with deliveries extending into 2019. Sembcorp has a net order book of S$12.7 billion, with completions and deliveries stretching into 2019.


Coven said...

SMM and Kepcorp are also investing heavily on LNG. Interested too in Keppel, AK?

yeh said...

haha, AK

i am eyeing this one also...
as you know, i am blue chip fan:)

AK71 said...

Hi Coven,

KepCorp? That would be a conglomerate like SembCorp.

Conglomerates are a bit harder to understand because there are so many businesses involved. I haven't studied them much but I suspect it would take quite a bit more effort and time.

Would you like to do a guest blog on KepCorp for ASSI? Yah, lazy me. ;p

E H said...

Buy at 3.6, buy at 3.2, buy at 2.8, buy at 2.4, buy at 2.0, buy at 1.6, buy at 1.2, capitulate at 0.8?

AK71 said...

Hi yeh,

Et tu? LOL. OK, welcome to the club. ;p

AK71 said...

Hi E H,

With a NAV of almost $2.00 per share, if the stock should trade at $0.80, I would go borrow money from everyone I know to buy more, as long as the fundamentals still look good. ;p

Casey said...

Hi AK,

Just to share my experience with Noble, at 1.01 I bought 10lots, 1.08 5 lots, 0.90 10lots, 0.87 10lots, 0.85 10lots, held on, and sold 20 lots at 1.35, 20 lots at 1.40. Bad start, but still profitable at the end. I invested in Noble after some detailed FA, I was pretty sure on the recovery of Noble and Olam at that time, however, I seemed to time the entry badly.

Having started at 3.93, I do think that I have started badly again in my accumulation for SMM, hopefully it will not end too badly. I bought in SMM share based on my FA, and was anticipating a moderate net margin recovery in 3Q and 4Q.

Your seems to have timed the entry very well most of the time. Could you share your method?



AK71 said...

Hi Casey,

Just dumb luck, I guess, and I am mostly serious when I say this. :)

I am corrupted by technical analysis (TA) and I often use the charts to take a peek at Mr. Market's psychology before deciding on a course of action.

Since TA is largely about probabilities and not certainties, if things turn out the way I think they might, then, I am just lucky. :)

pf said... abt bad SMM at 4+ ah. :(

EY said...

Hi AK,

SMM has been a trade turned bad for me. Still bleeding, badly. Since more than a year ago. Could have paid for my renovations with the floating loss on this counter. Still holding on. It's one of those decisions that I jab myself in the rib. Turning a bad trade into a long term investment? Most disastrous form of catharsis, obviously. The turnaround is going to take really long for this one. Thinking about the opportunity costs. Sigh.

$3.30? I think I would need blood transfusion! LOL. I won't be buying more. If anything, it would be wiser for me to cut my exposure when I see the next rebound and switch the funds to another counter with better anticipated returns.

But I'm certainly very happy that you have become a shareholder of SMM. So I can conveniently tap on your analysis. Thank you, AK! :P

AK71 said...

Hi pf,

I have had my share of bad entries despite reminding myself that entry prices are important. Sigh.

Looking at it positively, it is part of the learning experience, isn't it? ;)

Well, the important thing is to have a plan on what to do. :)

AK71 said...

Hi Endrene,

Knowing that you won't be buying at $3.30 tells me that Mr. Market could possibly capitulate at that level. That would give me even more confidence to increase exposure then. ;p

The best time to buy into a healthy business is when everyone is pessimistic and has given up investing in it. Of course, we have to ask the question if SembCorp Marine is still a healthy business then.

Having said this, the downtrend is still intact and this could turn out to be partially a trade for me.

AK71 said...

Oil production in the United States is booming, thanks to oil shale extraction, and exports are on the upswing in Russia, Libya and Kurdistan. Key exporter Saudi Arabia also cut oil prices for the fourth straight month this week to defend its market share. In the third quarter of 2014, both Brent and New York oil prices have shed approximately 15 per cent of their value on generous supplies and slowing consumption growth.

Oil prices have also been under pressure from a rising dollar, which hit a fresh four-year high against the euro on Friday helped by the jobs report. The dollar firmed to $1.2501 against the euro, a level last seen in late August 2012, and remained close to a six-year high against the yen.

A stronger greenback makes dollar-priced commodities more expensive for buyers using weaker currencies, which tends to dent demand and push prices lower.


EY said...

Hi AK,

I'm sure $3.30 would be a good entry point. I would buy if I don't have a position yet. I don't make good my bad decision by averaging down. I look somewhere else. To get a 30% return on SMM at $3.30, the price has to go up to $4.29 and to get 40%, it's $4.62. Time frame? I have to consider opportunity cost and risk management. I decided to hold on to SMM because it pays pretty good dividends and that's what trapped me in the counter. I won't sell at current price and definitely not at $3.30. But I won't buy more either. I have my own rationale for my decisions and time will tell if I'm lucky (wanted to say 'I'm right' but decided it's a wrong phrase :P)

Reminder to myself - never mix my trades with investments. But a tiger doesn't change her stripes, unfortunately! LOL.

pf said...

Yar rationale same as EY

FoodieFC said...

went in at 4.07 in Feb.

These days I have not even went to check the price. Surprised that it dropped till so low. Probably will considering buying again at this price.

Need to buy something that I do not need to monitor constantly and am confidence that the price will go up =D

Solace said...

Sounds like a good nibble.

I have been interested in this for a while, but the trend is downwards so i have been waiting at the sideline.

However, at $3.30 it will definitely be very interesting.

Betta man said... - for sharing

AK71 said...

Hi betta man,

Aiyoh, must register to read de. :(

Would you like to share the salient points here with us? :)

Anonymous said...

Hi AK,

I believe in the offshore oil and gas sector.

Energy is going to be needed when urbanisation and industrialisation is happening. Shale gas may be booming in the US, but not elsewhere. It means its not economically viable yet everywhere. Furthermore, oil and gas export out of US is currently banned and wont affect the supply too much even when the ban is lifted.

So, offshore E&P still needed and Keppel and Sembmarine are 2 of the largest offshore marine companies. So wont go wrong. Furthermore, only SMM is building drillships. Keppel is stronger in jackup rigs but yet to build drillships but do have proprietary design for one. Drillships allow for drilling in deeper water. So, SMM may have a slight edge as offshore e&p is going to be in deeper and harsher waters.

Hence, I'm going to accumulate more SMM.


Betta man said...

AK71 said...

Hi finance,

Thanks for sharing with us your point of view. Appreciate it. :)

I just wonder what would happen to the price of crude oil if the USA should become self sufficient in oil. If the price of crude should decline to a level as to make deep water projects financially unviable, then, SembCorp Marine would find itself in trouble.

Siew Mun said...

I venture to guess somewhere between 2020-2035 US will achieve self-sufficiency in oil. Have a look at:

U.S. Will Be Energy Self-Sufficient by 2035 on Shale, BP Says

US to achieve energy self-sufficiency by 2020: Exxon Mobil CEO

AK71 said...

Hi Siew Mun,

Yup, if that were to really happen, then, the rest of the world must pick up the slack as the USA reduces import of oil by then. Otherwise, oil prices could sink more.

If prices sink too low, deep water projects might not be economically viable and SembCorp Marine's business would be adversely affected.

Will have to keep a ear on the ground. :)

Unknown said...

Hi Siew Mun,

Wow! So we should invest in shale extraction companies, and companies that build drills ,etc for these companies? =D

Do note that due to the drop in gas and oil prices, profit margins in the Shale oil/gas industry are also squeezed.

Invest with care!!

Anonymous said...

Hi AK,

When US becomes self-sufficient for its energy needs, its good for the country. However, global demand will still determine the price of oil and gas. Furthermore, OPEC can tilt the balance by controlling their output. And don't underestimate China's demand for energy needs. The South China Sea dispute and the mega gas deal with Russians are all in a bid to secure China's energy needs.

Not forgetting India under the Modi government. It intends to grow India's manufacturing contribution to GDP from current 15% to 25%. Industrialisation needs energy and reliable energy too!

Anyway, I'm not only just accumulating Sembcorp Marine. I will accumulate Keppel Corp too when I think it's underpriced.

My 2 cents worth.


AK71 said...

Hi Naro,

For some reason, I didn't see your name at the end of your last comment. Apologies. :(

Well, I don't think the big picture will change much in the next few years although I am not so sure about how the picture might look like beyond that.

KeppelCorp at $10 a share? It could happen. :)

Anonymous said...

Hi AK,

No worries. :)

Near term won't change that much. Fracking is still considered unconventional method.

Waiting for Keppel to be underpriced! Hehehe.

Regards ,

anon said...

Hi AK, could you tell us what TA indicators you use to help your entry and exit? I am not into TA and prefer FA, as I believe TA tells you what happens only after the event (although FA is likewise historical, but I see FA more as a foundation & track record of management's ability to bring the business forward). So if TA is after the event, how do you manage to time your entry so well? Please don't say luck ;) Hope to learn from you about the TA you use. Thanks.

AK71 said...

Hi Jojo,

But, but, but... LOL.

I am really telling the truth when I explained to Casey in an earlier comment here that TA is about probabilities. So, luck is important.

However, I will tell you that Michael Kahn's book on TA has the biggest impact on me as a chartist.

So, if you want to know what makes AK the TA guy ticks, you want to read his book which I have listed in the following blog post:
Recommended Books for FA and TA.

Maybe, I should include TA in my teaching subjects as a private tutor. Haha... ;p

AK71 said...

Maintain BUY, TP S$4.82.

These investments are expected to be funded by its recently announced S$600m bond issue and internally generated funds. SMM’s balance sheet remains healthy with S$880m net cash as of end June.

We expect SMM to stay net cash, albeit declining, these two years on the back of high capex and weakening payment terms. The rig-building sector is dampened by
fears of cuts in E&P capex and short-term oversupply of rigs, but we believe Singapore rig-builders are better positioned to ride the market conditions, with efforts to move up the value chain and establish a presence in
protected markets.

Source: DBS Vickers

AK71 said...

Sembcorp Marine (SMM) announced this morning that it has secured a US$696m contract to convert a shuttle tanker into a FPSO vessel for OOGTK Libra GmbH & Co KG, a JV between Brazil’s Odebrecht Oil & Gas and Teekay Offshore. Scheduled for completion in 3Q16, the FPSO is expected to be chartered to Petrobras for work for about 12 years in the Libra field in the ultra-deepwater section of Brazil’s Santos basin.

Brazil has been a major driving force behind FPSO demand and SMM is well-positioned to service this segment. With this latest contract win, SMM has secured about S$3.6b worth of work YTD, accounting for ~90% of our full-year new orders forecast.

Maintain BUY on SMM with S$4.18 fair value estimate. (Low Pei Han, OCBC Research.)

AK71 said...

Two subsidiaries of Sembcorp Marine (Sembmarine) have secured offshore energy related contracts worth a combined S$222 million, the global marine and offshore engineering group announced in a press release on Monday (Oct 20).

One of its units, Sembmarine SLP, has been awarded a contract by Siemens Transmission & Distribution to design and build the offshore substation platform for the Dudgeon Offshore Wind Farm.

Meanwhile, Sembmarine's other subsidiary Jurong Shipyard has been contracted by its regular client MODEC Offshore Production Systems (Singapore) to repair and convert a Very Large Crude Carrier into a Floating Production Storage and Offloading (FPSO) vessel.


AK71 said...

Sembcorp Marine subsidiary PPL Shipyard has won a US$240 million (S$309 million) contract to build a jack-up drilling rig from BOT Lease, a leasing company of the Bank of Tokyo-Mitsubishi UFJ.

Sembcorp Marine on Monday (Nov 3) announced the deal, adding that the contract value may be higher on additional specification requirements, depending on negotiations between both parties.


AK71 said...

Sembmarine said it has a net order book of S$12.6 billion with completion and deliveries stretching into 2019. This includes a total of S$4.2 billion in new rig and offshore conversion contracts secured since the start of 2014, but excludes repair and upgrade contracts.

Looking ahead, the company said despite the current low oil price environment, long term fundamentals driving the offshore exploration and production market will remain stable.

However, reduction in capital expenditure spending in the sector could impact new orders and keen competition will continue to exert pressure on margins.


vicster said...


Any thoughts of Sembcorp Marine?

I entered yesterday around 3.25 thinking it was a good price and voila, it was sent crashing down today and looks set to fall further to below $3. *YIKES*

AK71 said...

Hi Vicster,

Well, if you think you got in at a good price, that is all you need to know to stay invested. Price can always go lower. If it goes lower, it would mean that there is greater value for money. :)

Anonymous said...

Hi Ak and rest
Does Semb marine build rig for shale?

AK71 said...

Hi becks,

I do not think so. Facing strong headwinds, it could be a good idea to wait for the dust to settle. Not for the faint hearted.

Anonymous said...

ya the oil is free falling. Do you think semb marine will go into drilling shale. Did some googling shale seem to be more ex to dig than oil

AK71 said...

Hi becks,

I do not know if SMM has that in mind but deep sea oil is the most expensive to exploit. So, we expect that to go first. Shale oil has become relatively less costly to exploit but exploitation in waters not deeper than 400 feet is still more economical compared to shale oil. So, the jack up rigs which SMM is famous for are still in demand, for examples, in the waters around Malaysia, Indonesia and Vietnam.

INVS 2.0 said...

Hi Ak,

Sembcorp Marine has fallen significantly over the months. Recently, its Brazilian customer is in liquidity crisis and oil prices are still depressed today. Do you think there is anymore prospect with this company?

AK71 said...

Hi INVS 2.0,

The fortunes of commodities are in a cycle. What goes up must come down and the opposite is also true. I do not think the world can do without crude oil which is a finite resource.

SMM is a company that has been around for a long time which has been through booms and busts. It is not a start up. I am willing to stay invested, wait and see.

INVS 2.0 said...

Hi Ak,

Thanks for sharing your knowledge on SMM. :)

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