Monday 11 May 2015

Sembcorp Industries - An Uncertain Outlook

As we know, I have liquidated all remaining stake in Sembcorp Industries.

Here are my reasons for selling my remaining stake.

1) Fundamentals have changed significantly.

Weakness in Utilities Division

My optimism and bullishness in the Utilities sector was not realised, at least not until the next few years. The Utilities division was where I had pinned hopes on recovery for Sembcorp Industries, where I had hoped that the future growth in this division will compensate for weakness in the Marine division owing to the weaker oil prices. Expansion in emerging energy markets will take time for it to be realised in Sembcorp's earnings, so I would be better off deploying the cash to better dividend yielding counters while I wait for Sembcorp to show greater earnings visibility.

Higher Price to Earnings

Revenue was down 11% year-on-year and the more alarming issue was that net profit for this period slumped by 23% year-on-year. As a result, earnings-per-share (EPS) also reduced by 23% from 10.25 to 7.79 cents.

This will have negative consequence to the price-to-earnings (PE) ratio. The PE would now have been increased significantly of which I am a little more uncomfortable to be holding long term.

Negative Free Cash Flow

Cashflow from its operations was $152.1 million against its expenditures of $390 million, which largely means that for this quarter, Sembcorp has a negative free cash flow of $237.9 million, down from a positive free cash flow of $567 million a year ago. This is definitely not so good news for income investors like ourselves, so I would prefer to let things pan out further before considering to invest into Sembcorp Industries again.

Weaker Balance Sheet

A year ago, Sembcorp Industries can be touted as a net cash company which could serve as a dividend play as a replacement for REITs in the face of impending rising interest rates. Its balance sheet boasted a net cash position of $734 million. 

Fast forward to 31 March 2015, the company had $1.6 billion cash and $5.5 billion debt, i.e. net debt of $3.9 billion.

This is not so good news for income investors like myself looking for companies to replace REITs' income on their portfolio. Getting a debt-laden company is as good as sticking on to a REIT for its income, as it derives its income by taking on debt.

Uncertain Dividend Yield

The dividend yield, though decent, is also likely to be affected if persistent weakness in both divisions continue. Negative free cash flow this quarter is a bad start to the year and if it continues, it will certainly have an adverse impact on the stability of the dividend payout.

At the current 3+% dividend yield, I have considered carefully and given that the same money can be put into high interest yielding accounts like the OCBC360 at around close to 2% with absolutely no risks involved, I would definitely choose the latter.

2) Bumping up Warchest for other opportunities.

Definitely liquidating positions allow me to increase my Warchest to be more prepared to tap onto interesting opportunities in the market. Although the position is relatively small, the increase of cash in the Warchest would be very much welcome.

4) Reducing exposure to oil-exposed plays.

I have an increasing vested interest in an oil stock play as a result of working for an oil and gas MNC, which offers s stock plan for its employees. Thus, it is inevitable that my portfolio would would slowly be tilted in proportion towards the energy sector as I continue to work and contribute towards the stock plan.

Therefore, as part of a review and re-balancing of my portfolio, I have decided to divest Sembcorp Industries.


The situation facing Sembcorp Industries is very challenging one indeed, as it is facing competition in all fronts. The diversification which I had earlier believed to be the catalyst for further growth has proven to be affected by the oil market environment as well. Therefore, the reasons of wanting to invest in Sembcorp is no longer compelling as it was used to be, and I believe there is no further catalyst for growth, until perhaps when the power markets in India and China takes off. Rather than letting money sit around in a company with no immediate visible catalyst, I would prefer to divest and monitor from the sidelines at the moment. 

Please do note that this is entirely my take on this situation and a different investor may continue to hold the investment for its future growth. He/she may prefer to collect dividends while waiting for Sembcorp's investment in the emerging markets to take off. No one method is right, and each investor takes his/her own path to financial freedom.

As we know, the investment in Sembcorp Industries was essentially 'free', but if the situation warrants the sale of the assets, then I will not hesitate to do so. Therefore, in the meantime, this 'free' money will be recycled back into the Warchest, and will be deployed as and when the situation calls for it. 

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