The Marine Giant Within SembCorp Industries

Two weeks ago, I covered the business segments of SembCorp Industries Limited (SGX:U96). On the following week, my focus was its sizable Utility business segment. There is one more equally large business segment within SembCorp Industries, and that is the Marine business segment. That segment’s contribution mainly comes from its 60% ownership stake in SembCorp Marine Ltd (SGX: S51), and makes up 51% of SembCorp Industries’s revenue. This will be the focus of this article.

As a brief recap: Over the past five plus years, SembCorp Industries has been a steady source of dividends. Foolish dividend investors would be excited to know that the annual dividends has been increasing as well. Starting from 2009 (the company has a financial year which coincides with the calendar year), the dividend of S$0.11 per share had rose to S$0.17 by 2013.

For the first half of 2014, the company also announced a surprise interim dividend of S$0.05 per share. This was the first time an interim dividend was offered. Collectively, the company had paid out S$0.76 in dividends since 2009.

The returns from the share price has been satisfying as well. From 1 January 2009 to 18 September 2014, it delivered capital gains of around 113%. By comparison, the total returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 77% for the same duration.

Diving under the hood

Sembcorp marine graph 1

Source: Company Earnings Announcement

Sembcorp Marine’s business is made out of three major sectors. The first sector is rig building, and makes up 64.5% of the Sembcorp Marine’s 2013 revenue. It is a global leader in rig building. It has capabilities in design and building of jack-up rigs, and construction of semi-submersible rigs for the offshore oil and gas industry. Among its customers are Seadrill Ltd and Atwood Oceanics, Inc.

The offshore and conversion sector is the next largest with close to 22% of Sembcorp Marine’s overall revenue for 2013. Projects for the offshore and conversion sector include conversion of tankers to Floating Production Storage Offloading (FPSO) units, Floating Storage Offloading (FSO) units, and the conversion of pipe-laying and construction barge.

Finally the repair sector makes up about 12% of its revenue. This includes ship repair, and tanker repair for mid-sized tankers to Very Large Crude Carriers (VLCC) and Ultra Large Crude Carriers (ULCCs).

Revenue for the three sectors are reliant on the recognition of its project revenue, and the individual projects tend to be sizable. As such volatility in revenue should be expected from year to year. There is no breakdown of the sector profitability provided, but we can look at the cash and borrowing levels for hints.

Sembcorp marine graph 2

Source: Company Earnings Announcement

Sembcorp Marine’s cash and equivalents has been relatively healthy for the past five years. Bank borrowings has increased to $766 million in 2013, mainly due to capital expenditures for the new yard that it is building in Brazil.

A quick peek into the future

One way to estimate the mid-term growth for Sembcorp Marine is to look at its net order book. As of the end of 2013, the outstanding orders include $1.6 billion for semi-submersible rigs, $2.4 billion for jack-up rigs, and $2.2 billion for conversions and platform. Interestingly, the net book order also includes $6.1 billion of drillship contracts. The breakthrough year was 2012 when Sembcorp Marine secured seven proprietary drillship contracts. For context, Sembcorp Marine’s revenue for 2013 came in at $5.5 billion.

SembCorp is also looking to invest in a new steel fabrication facility at its Sembmarine Integrated Yard @ Tuas (SIY @ Tuas). The tonnage capacity for this fabrication facility is expected to increase by three times. This facility is estimated to be completed by the third quarter of 2015 and cost $222 million.

Additionally, the Marine group has Phase II plans for SIY @ Tuas which mainly involves building three additional dry docks to support its rig building and repair sector. The expansion is estimated to cost $489 million. To fund these two expansions, the Marine company has issued a $600 million bond on 4 September 2014.

Foolish take away

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the company’s share price is supported by the quality of growth that we are looking for.

The net order book for Sembcorp Marine still appears to be healthy, and the business segment has the cash position to take advantage of it. One thing to watch would be the execution of its projects. On top of that, the track record for its drillship projects should also be observed, as it may represent a new revenue stream for the future.

SembCorp Industries currently trades at a price-to-earnings ratio of about 11.6 and has a dividend yield of 4.2% based on the closing price on 18 September 2014.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.