What I wrote about Sembcorp Industries then and how it differs now

The last article about SCI was written during May 2015 here

Then, I said that I believed SCI is a solid blue chip. The pipeline for the utilities is superb and I believe it'll rebound from this crisis.

Have I differed?
To say the least, yes. Yes not because SCI fell from $4.20 all to way to $2.50, but because developments happened and news emerged.

Sete Brasil has changed the fundamentals of SMM, a 60% owned subsidiary of SCI.

To be honest, this Sete Brasil thing has changed the fundamentals from May 2015 when I still had much confidence in a near term rebound in SCI/SMM price.

Why I changed my mind?
Firstly, Oil prices fell, and it fell hard. Additionally, the oversupply of oil doesn't seem to be disappearing anytime soon. That's different in May 2015 when people are still expecting OPEC to convene a meeting soon to cut supply. [no supply was cut, more supply was granted!]

Sete Brasil had to have that corruption scandal and face bankruptcy risk. Over 40% of SMM's book order is from Sete Brasil and this changes the fundamental of SMM.

Iran's sanction lifting wasn't announced back then.

Did I sell SCI then?
No. No and I'm not sure if I'm making the right or wrong decision. My decision is to not sell or buy SCI despite the current attractive price.

I'm doubting myself over not selling SMM because my motto has always been to "sell when the business fundamentals change materially". It indeed has, perhaps its the huge loss that's preventing me from realising the loss.

On the other hand, I like the utilities segment of the company. Also, I do not require these money in the short term and so I can afford to wait it out (hoping for a miracle I know).

In any case, should the utilities segment also face a structurally decline in business, I promise myself to sell out this position and serve as a reminder to myself in the future.

*fingers crossed*

My view on SembMarine's Profit Guidance

As we know, Sembmarine issued a profit guidance for Q4 2015 stating that the quarter will likely see a net loss with the full year result affected accordingly.

I'm vested in SCI, naturally this becomes a concern for me. I did some quick research on SMM.

First ever net loss quarter for SMM

This would be a first ever net loss for SMM. A quick check on their quarterly showed that SMM has always registered a profit for each quarter.

I'm guessing a large part of this net loss is attributable to the reversal of profits pertaining to Marco Polo (either on a prudent basis or with consultation with their auditors on the accounting treatment).

SMM closed $2.06 and is heading for trouble

Looks like SMM will definitely open below $2 on Wednesday morning (3 December 2015) and possible heading to the $1.60-1.80 range. 

"I will buy it when it hits the price levels of 2008!"

I won't be so quick to say that (even if I'm interested in an all-marine counter). This time round, it's different.

I've mentioned previously that SMM actually registered healthy profits since being listed (including the 2008/09 period). We must always remember to look back at the fundamentals.

Oils prices were trading around $40 but quickly recovered to above $80 and later $100 as there was the Iraq war and Libyan uprising. 

Now, however, oil prices are depressed due to oversupply and low demand. Sanctions for Iran was lifted and more oil will be pouring in the market. Shale oil is producing more oil than it was during 2008. Demand is slowing due to the China. I could go on and on, but my point is, there situation is quite different now from 2008.

Just because 2008 was the lowest price for SMM doesn't mean it can't go lower.

My take on the whole Marco Polo saga

SMM has been in the rig building business for so long and it earns a good reputation. As with any engineering work, there'll always been "defects" and imperfections. It'll be inconceivable to think that SMM's work is so "bad" that it'll affect the main function of the rig. If you nit pick, you'll bound to find something. If Marco Polo is looking for a perfect rig, they might as well not.

Marco Polo is either too new to the rig industry to know that those "cracks" are the norm or they're simply finding an easy way to wiggle out of the contract after the oil market crashed. 

SMM didn't deny the allegations on the "cracks" probably because those cracks really exist but they are also deemed to be reasonable. It's anyone's guess really.

What about SCI?

SCI owns about 60% of SMM. For the 9 months ending September 2015, profits from Utilities stands about $300m with Marine taking about $150m.

For the full year, I'm expecting profits from Utilities to be about $400m and Marine about $100m (worse case). This would result in about 26 EPS and with $3 share price, that'll be about P/E of 11.5

Forward P/E?

I don't have the crystal ball. But just to be on the conservative side, let's assume the following profit: 

Utilities: $450m 10% growth (India in GROWING).

Marine: $50m halved profits

This would roughly give a comparable profit year on year. I'm bull on utilities as Singapore contributions have levelled out and overseas contribution is expected to be the main uplift.

That'll mean full year EPS for next year might be 26cents as well.

If given a chance, would I still buy SCI?

Quick answer is no. No, because I don't like the fact that there's no clear positive catalyst insight for the Marine industry. But now that I'm already vested, would I realise my loss? No. My gut tells me that SMM will ride out this storm. It just needs a little more time.

Will Sembcorp Utilities arm ride out the storm?

Sembcorp Industries' Utilities arm Q1 2015 net profit dropped 19% Y-O-Y. Will Sembcorp Utilities ride out this storm?

What happened?
Utilities dropped 19% largely due to lower Singapore's contribution. Why? All because of the drop in "Vesting Contract Level" (VCL).

What is VCL?
Vesting Contract was introduced by EMA (Energy Market Authority) in 2004 to curb the abuse of market power by the leaders.

How does it work?
With Vesting, a percentage of the market's volume is sold on a fixed price.
In 2014, VCL was set at 40%, with the vesting price 31% premium to the spot price.

This meant that 40% of the Genco's revenue was recurring in nature, set at 31% above the spot price.

EMA dropped a bomb
At its biennial review, EMA will decrease the VCL from:
From 40% in 2014 
to 30% in 1H 2015
to 25% in 2H 2015
to 20% in 2016

Since Vesting price was about a third above the spot price, a decrease in VCL meant a drastic drop in revenue for the genco.

Singapore vs Overseas
Net profit between Singapore and overseas' utilities is about 50-50 in 2014. In Q1 2015, the tables have turned.

Q1 2015's quarterly result - Utilities

Concentrate on sowing seeds for the future
There's no doubt that the short term prospect for SCI looks bleak. With the situation in the local electricity scene and the abysmal order books in the Marine sector, there's little wonder why SCI's price have fallen so much.

After all, 2015's result is expected (and on the way) to be way below 2014's.

However, I always remind myself to focus on the fundamentals. Management, although aware of the current situation, is focused on the future.

Overseas Utilities is the hero

- from Sembcorp's website

India's total power capacity alone would dwarf Singapore's by 2017. Having a foot set in a power-hungry India bodes well for any future expansion there.

Continued push towards renewable energy

Management has shown that they're not resting on their laurels, relying on the traditional sources of energy. Sembcorp share of renewable energy output has grown from 5% a year ago to 15% now.

This equipped SCI to ride on the growth of the renewable energy sector.

The future
Whether these seeds will grow and succeed in the future awaits to be seen. At least now, I'm happy to know the management team behind SCI Utilities is working hard for its future pipeline projects.

Should you accumulate more now that it's near 52-weeks low?

I know I'm not about to be scared by this volatility and abandon this ship. I'm happy enough to retain my existing holdings and ride out this storm.

Sembcorp Industries - should you be worried with the slump in prices?

Sell off

SCI's share price has been steadily dropping, this follows the general drop in oil prices. However, SCI recently announced their quarterly results and both Marine & Utilities segments aren't doing too well. In fact, the decrease in Utilities profits is larger than Marine's.

Should we be concerned?

Majority of the decrease in Utilities profits is due to the continued intense competition in Singapore. The increase in contributions from India isn't enough to offset the decrease in Singapore's profit.

JIA LAT! How? Many investors are dumping this business (which explains the drop in share price).

SCI closed at $4.19 today, and has been steadily defending the support at $4.20.

The next crucial support is at $4.10.

This seems very TA-ish for me. What happened?

Are you a trader or investor?
Well, I'm still a FA guy. My investing horizon isn't 12 months. I'm not particularly concerned with these fluctuations in prices. Some people, however, love to get excited about the rise and fall of SCI's share price. Since I'm not trading, intra-day fluctuation doesn't bother me much.

I still believe that SCI is a solid blue-chip. It has superb management driving the business. It has gone through the 2008 GFC and bounced back. The pipeline for the Utilities segment is strong and encouraging. Marine should recover in the future (i hope).

Accumulate?
Once it drops to $4 - $4.10, I'm looking to average down on SCI. I've faith that SCI will do well in the next 5 years. I don't particularly like to buy and sell off my holdings too frequently to realise my gains/ cut losses. The most important element in investing is time, and time is our best friend.