Tuesday, June 9, 2015

A second look at Sembcorp Industries.

The holiday is finally here, and finally get some time to do some online research on companies.

It kind of coincide with the sales that is going on with the market right now. I will be looking at various companies and decide on the shopping list later.

I will not do number crouching here.

Sembcorp Industries faced 2 headwinds.

1) Lesser retail contracts and and lower rate of re-contract of utilities in Singapore.

2) Sembmarine's drillships time bomb

Of the two, the second reason is the scary part of the equation. I believe India's Operations should be able to offset the weaknesses in the local utility scene.

Look at the capacity of India, it is 3 times that of Singapore, of which 500 MW is already committed and " will be sold to the Central, Eastern, Southern and Northern Power Distribution Companies of Andhra Pradesh for a period of 25 years." (Source: http://www.tpcil.com/PPA.html)

Andhra Pradesh needs a new capital and with all the building going on, it will be power hungry. (http://www.straitstimes.com/news/asia/south-asia/story/singapore-help-develop-new-capital-city-south-indias-andhra-pradesh-20141)

Also China water capacity will be increased by 4 folds once Nanjing and in particularly ChangZhi becomes operational.

SembPower has no moat of whatsoever in the local supply scene as it is a small niche player at Jurong Island only. Look at the EMA report:


The scary part is the drillships contracts which is about 5.8 billion of the 10.6 billion order that sembmarine is currently holding. If will not be pleasant if Brazil Petrobras do cancel the orders.

In terms of valuation, I play around with the DCF parameters and did a reverse DCF. For Sembcorp to be at $4, it should generate 350k FCF annually (Conservative), at 4% growth rate and 8% discount rate. (with 20% MOS) Another combination is 500k FCF at 10% discount and 3% growth rate without MOS. I do not find these metrics screaming "undervalued" with the uncertainty of fate of the drillhips.

It seems with a yield of sub 5%, I should keep looking. If drill ships orders are intact, Marine should limb along, and growth rate should be reasonable even at 4%. 

Q2 might provide a cigar butt moment if Sembcorp continue its fall. With China and India contributing more in the utility segment and UK sale of asset and land sales booked in Q2, It will and should be a much better quarter than Q1

Will continue to look at other companies. Another company I wished to take a closer look will be M1


  1. Hi SI
    I just added some semb corp at 3.97.
    Well. Thinking to average down and also hold for long term.

    This sell down. I only able to scoop 3 lot semb corp and 3 lot singtel.

    Well. Not much money left. Must be more prudent in buying:(

    Btw, how do you do? Hope you are fine.
    Also hope your mum is ok.

    1. Hi Yeh,

      I am a bit over-worked. Now that I am catching a breather, I feel better.
      alThough I am still returning to work to clear backlog
      My mum is coping fine with Chemo.. Lucky.

      I don't have much money too. Thinking of getting Sembcorp that day at sub 3.9 but decide to keep my powder dry.

      I brought back China merchant pacific thou... I was lucky, manage to buy 1 more lot with the money I sold earlier and still have some change left. YIppee! So happy. Not wonder trader get a thrill.

    2. got time try to spend more time with your mom, every moments counts.
      My mom had breast cancer for 3 years and passed peacefully last friday.

      hope your mom will get well soon, jia you~

    3. Hi Felix, hope u are fine. My condolences. Peacefully, that's important.

      Indeed, spending a lot more time at home now.

      You take care.