Wednesday, October 15, 2014

Sembcorp industries Part 1

Trying to consolidate my thoughts here.

Sembcorp is a cash generating net cash company, with positive FCF 11 out of the 15 years record that I tracked.

I am particularly interested in the utilities segment, as I see it as both a cash cow and a growth sector.



Since its inception in 2001, it has almost an unbroken track record of growing EBIT (I used this for consistency with earlier 2001-2002 data). While I still cannot not ascertain how much of the revenue is recurring, but I know recurring income form a portion of it, otherwise, it is unlikely that Hyflux is burning cash, and Sembcorp with also its water business, is generating cash. Note also that 2013 UK operations is making a loss of 52 mio, but earnings before tax and minority interest still grows.

It also has a good pipeline of projects:

(Source: 2013 AR)

Utility has taken over marine as the top contributor, and the Urban Development segment, while doing well in Vietnam with hugh landbank is too small to make a big contribution.

Valuation wise, it is very decent. 

Using DCF with FCF assumption of 500 mio, At current prices, it is trading at 3% growth rate, and 8% discount rate with 20% MOS. Believe the assumption is quite conservative. In term of PE, it is trading at PE 12-13, not demanding too. 

It seems rather clear sky over the next few years, with the marine segment also having a strong order book.

Only one bug bear.

Dividend yield, I am OK with around a 4% yield for a good blue chip for long term growth. However, I suspect Marine might be the spoiler in years to come.

I am very apprehensive about the oil and gas sector. I will need to dig more before I decide what to do. I believe many think the O&G is a evergreen sector, it is not, it is cyclical. And I think we are closer to the peak than to the bottom. Why?


(Source: http://www.wtrg.com/prices.htm)

Seem like the rig business is having a party for a decade.

High Prices attract more supply. As seen in all cycles 



While the fleet net gain has been falling, it looks like the high oil prices in the 2000s has generate 6-7 years of good net gains, and if Keppel and Sembmarine order book is anything to go by, the newbuild deliveries are not falling off the chart too.

Rate is holding up though,which is good news, meaning there is no serious over supply yet?


Source of pictures: http://www.ihs.com/pdfs/Jackup-Rig-Market-Report.pdf

Please click on the report to read more, although the report is old, but it seem provide some good insights for me. 

I am not industry expert, I just told myself it is better to buy survivors in down cycles than winners in up cycles, there is why I bought YZJ when BDI collapse, many shipbuilders collapsing, meaning rate is so low that it is squeezing out players, I know we are nearer to the bottom than anywhere near the top. Applying the same logic...

Ok, this blog post is taking much longer than I thought, and I am not even vested! Time to sleep. 

Cheers,
Silly investor


6 comments:

  1. Hi SI,

    I like your analytical approach towards SembCorp's business. I have never taken a deep look at Singapore's blue chip companies.

    Your research is an eye opener for me. Thanks for sharing!

    ReplyDelete
    Replies
    1. SRSI,

      You are too kind. Glad u like my analysis :)

      Delete
  2. Replies
    1. Monitoring closely, especially with the sea of red...

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  3. what if it is trading as if it doesn't grow, because market doesnt expect that kind of growth rate.

    ReplyDelete
    Replies
    1. Indeed drizzt,

      I think discount of 8% is reasonable, but I cannot be sure about 3% growth especially with the marine sector as a spanner.

      In the next 1-2 years, low single digit growth should happen though. Utility and urban should continue to grow and marine should not fall off cliff. But 1-2 years horizon, the yield is just not tasty ...

      Delete