Sembcorp Industries

Going to look at this company today. It closed today at $3.30, after a 10 cent drop today. For those who don't know the company, it is a company that deals primarily with the utilities and marine sector. In the utilities segment it is in the energy, water and waste management businesses while its marine segment, which contains subsidiary Sembcorp Marine, makes the bulk of its revenue from rig building and offshore conversions/platforms.

(Image source: http://www.siww.com.sg/)

Starting off with the balance sheet. The company's net current assets seems to be quite ok, with around 10% more current assets than liabilities. But one thing to look out for is that most of its current assets is made up of work-in-progress and inventories, so if they are unable to be sold or completed, they may be unable to meet their current liabilities. The company has been increasing its borrowings as well as adding on perpetual securities, which is not a really good sign considering that its earnings has not gone up a lot in the mean time, but then again, maybe the increase in work-in-progress and the increase in debt may be linked and they are working on new projects (I'll mention some towards the end). Last note on the balance sheet is that it has $391 million intangible assets on $5.41 billion equity attributable to owners of the company, with total equity being $7.23 billion, which is around 7% of the former number and 5% of the latter number.

The profits for the company have been fairly stable for the past 5 years, with total net profit staying above $1 billion and diluted earnings per share staying above 40 cents. Nothing much to comment here, it seems like a stable company that may not grow at a very rapid rate though, but its P/E ratio is around 7.5, which is quite low so that's good too.

The company isn't generating a lot of cash and as mentioned in the balance sheet segment, has been increasing its borrowings, while increasing its PP&E investments and also increasing its working capital. This may be good as while it isn't really showing in the profit and loss statement, the company may be investing in increasing its capacity in the utilities segment or expanding into other markets which would help to increase its profits in the future when the investments have been completed and the facilities up and running.

As for other areas of the company, as most of us would know by now, the oil and gas sector is being hit by the low oil prices which don't seem to be letting up. Recently, Marco Polo Marine has also terminated a $306 million rig contract with a Sembcorp Marine subsidiary. Sembcorp Marine's 15Q3 net profit has also plummeted 76%. This is the more unsettling news, but Sembcorp Marine has also been able to clinch some deals such as a $1 billion deal with Maersk Oil North Sea UK Limited(through subsidiary SMOE Pte Ltd). It is also debatable whether this period of low oil prices is a good time to enter these companies.

The company has also been getting projects in the utilities segment such as a $390 million project to build, own and operate a 426-megawatt power plant in Bangladesh and has also commissioned a second unit at a coal-fired power plant in India.

I think this is quite a good company with pretty stable earnings. It would be affected by the low oil price, which is reflected in the share price, but unlike investing solely in its subsidiary, Sembcorp Marine, an investor in the parent company would be exposed to the more stable utilities business as well that may actually benefit from the lower cost of oil. The main risk factor to the utilities business I imagine to be would be the shift towards environmentally friendly ways of producing energy and also the larger focus on climate change by world governments, which may result in carbon emissions taxes and the like that would definitely eat into the company's profits unless they are able to successfully transition to renewable sources of energy before this change comes about (and remain just as profitable while doing so)

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