Friday 8 May 2015

The 'free' investment in Sembcorp Industries

My humble portfolio (as of 30th April 2015) consisted of a larger stake in Accordia Golf Trust and a much smaller stake in Sembcorp Industries. The smallish position was acquired earlier this year, when the SGX lowered the minimum lot size from 1000 to 100 shares. At that point in time, many brokerages were having discounts on their applicable commissions as long as you meet their terms and conditions.

So I took the opportunity to look for some shares which I would not mind holding a small stake in, which effectively means I have to be able to have confidence in holding it for the longer time horizon, while having a small enough stake so that the risk is comfortably managed. After looking through the market, it came across my attention that most oil-involved plays were heavily beaten down, given the dramatic fall in oil prices then.

Sembcorp Industries was trading at a P/E of about less than 10, while having a P/B ratio of slightly above 1. Furthermore, it has been consistently paying dividends of about 15 cents per share, which worked out to be a decent 3+% yield. From a valuation standpoint, it would seem decently fair valued, though not as good as a deal in the GFC and the major crisis levels, but good enough for a smallish stake. The impending Fed interest rate hikes would mean that I would also be looking for companies having the track record of being able to generate enough free cash flows over the years. Sembcorp Industries had been doing a fair job of doing so, and it is able to generate enough cash from its business to pay off its borrowings.

Sembcorp has 2 main business segments: Utilities and Marine. The oil exposed sector here would have to be the Marine business, which have seen some profits falling from the recent Sembcorp Marine's results, which probably was the main driving force of the selldown around the end of 2014. What I am more optimistic about is the Utilities business, which I feel have much more room for growth through overseas expansion into the main markets of power hungry China and India. It is clear management is trying to expand the Utilities segment, in order to diversify away from the oil-dependent Marine segment, which will remain the weakest link as long as oil prices stay low.

Singapore's Keppel Corp and Sembcorp Industries can been seen attempting to diversify away from oil dependent segments, preparing for a possibly long period of low oil prices. I had actually compared with Keppel Corporation attempts at diversifying out of oil by acquiring Keppel Land, its property arm. However, I am more bullish with the Sembcorp's Utilities segment than the Keppel Land's property performance right now, given that the property market is facing weak sentiments and there is no sign of visibility of a recovery just yet with the current weak global demand.

And so I took a smallish position Sembcorp Industries, which could be essentially be fully paid for by the realised profits I had earned from other investments for the period of 2014 and early 2015. I am currently still short of some cash to call it a 'free' investment, but I am expecting the maiden dividend from Accordia Golf Trust to allow me to achieve that easily. And of course, everyone loves a 'free' investment into income producing assets, in this case, an extra $10 a month of passive income.

However, upon the release of the results of Sembcorp Industries yesterday, my stance has turned negative, and I sold my remaining shares in Sembcorp Industries. Why the sudden change in stance? Wasn't I going for it in the longer time horizon?

Find out more in the next post.

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