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*
Hi there,
ReplyDeleteAs you commented in your first post, "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."
If it was able to survive the GFC, why do you believe now that it cannot weather the current oil slump? Is the current market situation temporary in nature, or will it last for some time? If it turns out to be a protracted cycle and 40% of its order book vanishes, why would you consider this as a change in the fundamentals of SCI? If a client responsible for 40% of its order book vanishes, were the fundamentals there to begin with?
Just some points I had in mind.
Hi there!
DeleteI'm still quite undecided with SCI and I'm still learning along the way. Let me try to rationalise my thinking:
1. Oil prices in 2008 crashed due to concerns about reduced demands. Prices recovered 1 year later on the back of stimulation to boost demand.
2. Oil prices now is due to supply overkill and the low prices seems to be going for a longer term. Stimulation of demand, for now, doesn't seem to plug the gap as supply is poised to increase even more = depressed oil prices may stay long enough to knock off SMM/SCI.
3. Even in 2008 when SCI was affected, SMM remained a net cash position, unlike now a net debt position.
My worry is that even if the management is superb, the macro conditions may be bad enough to kill the ship and sink it. Their balance sheet isn't as strong as 2008.
I may be wrong as well, but i'm still learning. Perhaps that's why i'm undecided on my position and have yet to execute any sell order.