Sembcorp Marine Ltd Is near Its 52-Week Low: Where’s The Bottom?

Sembcorp Marine Ltd (SGX: S51) has had a big change of fortunes in the last 3 years. The company had been one of the strongest performers coming out of the global financial crisis, gaining more than 300% from 2009 to 2011.

However, all that started changing in 2012 as the marine engineering firm has dropped by close to 30% since it peaked at around S$5.40 that year. In fact, Sembcorp Marine’s current share price of S$3.92 is just a hair’s breadth higher than its 52-week low of S$3.90.

What has happened to transform this Straits Times Index (SGX: ^STI) constituent from a market-darling to a market-outcast in just a few years? And more importantly, can it recover?

Sky-high expectations

Sembcorp Marine’s meteoric rise in price from 2009 to 2011 might have been a case of investors expecting too much from the company.

After the global financial crisis, the company was on a boom, and managed to earn returns on equity (ROE) as high as 46% in 2009. Its earnings per share grew by 22% in 2010 , with its dividend more than doubling in that year.

Investors looking at the company’s growth rate and very high ROE might have been very attracted to the firm. However, in 2011 and 2012, the company saw a decline in both its revenue and operating profit. Its ROE also dropped to a more sustainable level of around 22%. With its earnings per share falling from S$0.4155 in 2010 to only S$0.2581 in 2012, investors might have then realized that the company wasn’t able to sustain its growth due to intense competition from Chinese and South Korean competitors . With the drop in profit, Sembcorp Marine’s share price eventually followed suit.

Astute readers might have the following question: At its share price peak in 2012, Sembcorp Marine was only trading at a very reasonable price to earnings (PE) ratio of 13, so where is that case of “investors expecting too much from the company?” As it turns out, the sky-high expectations were on the company’s ability to sustain unrealistically high corporate performance (such as its ROE of more than 40%).

This is a good example of why it is important for investors to not have a blind focus on just a single metric like the PE ratio when it comes to determining how cheap or expensive a share is.

What’s happening currently?

Despite its falling profits, it should be noted that Sembcorp Marine is still a major player in the marine and oil & gas industry. It currently has an order book of S$12.7 billion which runs through to 2019.

Management for one seems optimistic about the company’s future. In fact, in the first half of 2014, the company had seen a 23% increase in its turnover with its earnings per share growing by 4%. Sembcorp Marine is also expanding with four new dry docks in Singapore and a shipyard in Brazil. All these are hardly signs of a company facing a structural and permanent decline.

Sembcorp Marine Ltd is currently trading at 15 times its trailing earnings and has a dividend yield of 2.77%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.