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.
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