Blue Chip Stock SembCorp Industries Limited is Down 38% Over the Past Year – Is it a Buy?

As one of the 30 shares that make up the Straits Times Index (SGX: ^STI), the blue chip SembCorp Industries Limited  (SGX: U96) may project an aura of a stable stock to own.

However, the reality over the past year has been a little different.

From its closing share price of $5.43 on 4 August 2014, SembCorp Industries’ shares have fallen a hefty 38% to $3.36 today. To some, it may feel like the lower share price presents an opportunity to pick up a bargain. To others, it feels like it’s time to dump the forlorn SembCorp Industries.

But before we jump to conclusions, let’s take a quick look behind the scenes to understand some of the reasons behind its fall.

A deeper look

SembCorp Industries Revenue

Source: SembCorp Industries’ earnings report

In the first-quarter of 2015 (Q1’15), revenue for the conglomerate was down 11% year-on-year.

The main culprit was SembCorp Industries’ Utilities segment which saw its revenue get sliced by 21% compared to the year before. While revenue from the Marine segment held up a little better than the Utilities segment in Q1’15, there are still questions swirling around on whether the Marine segment’s revenue can hold up in the face of a dwindling orderbook.

In Q2’15, SembCorp Marine Ltd (SGX: S51) reported revenue and profits which fell by 10% and 17%, respectively, compared to the same quarter a year before. (SembCorp Marine is majority-owned by SembCorp Industries and the former is what makes up the Marine segment for the latter.)

It’s clear that challenges within the oil and gas sector continues to plague SembCorp Marine at the moment.

SembCorp Industries Profit

Source: SembCorp Industries’ earnings report

As hinted on earlier, the fall in SembCorp Industries’ revenue has led to its profits stumbling as well. For Q1’15, profits for both the Utilities and Marine segment had tumbled around 19% and 13% respectively.

The fall in profits for both segments had in turn led to big declines in SembCorp Industries’ earnings per share (EPS).

SembCorp Industries ttm EPS

Source: SembCorp Industries’ earnings report

The chart above summarizes how the conglomerate’s trailing-12-months EPS has dwindled over the past few quarters. With a company’s profit being a good proxy for its underlying economic worth in general, it wouldn’t be unreasonable to think that the fall in SembCorp Industries’ EPS over the past year has affected its share price as well.

Meanwhile, not all stock markets falls are created equal. As I explained in a recent article of mine:

“If a stock price rises (or falls), we should try to understand if it is backed by a company’s fundamental growth (decline), or whether it is simply a result of investor exuberance (pessimism).”

In other words, the fall in a share’s price can be driven by a fall in its EPS, a fall in the market’s perception of the company’s worth (represented by changes to the price to earnings ratio or PE ratio), or a combination of both. With this in mind, I have summarized the impact that the falling EPS and PE ratio have had on SembCorp Industries’ shares over the past year.

2015-08 SembCorp Industries PE table

Source: SembCorp Industries’ earnings report

Taking stock

With reference to the table above, we can observe that the majority of the fall in SembCorp Industries’ share price comes from the market’s perception that its earnings will continue to weaken in the near future since it’s the decline in the PE ratio that’s been the most important contributor.

There may be some merit in the market’s perception since SembCorp Industries’ revenue and profits have been slipping over the past year and its outlook doesn’t look rosy at the moment.

Furthermore, we have to note that SembCorp Industries has increased its borrowings substantially over the past year, thereby increasing the financial risks it faces.

I may be accused of adding oil to flame, but it’s also worth pointing out that SembCorp Industries has recently generated negative free cash flow as well.

But all that said, SembCorp Industries has been able to generate free cash flow in the past in addition to keeping a solid balance sheet. If it’s able to turn its business around – and that’s a big if – then SembCorp Industries’ shares, at their current level, may turn out to be cheap.

Foolish takeaway

Looking at the fall in the share price of a company alone is insufficient in helping us judge whether a stock is cheap or still expensive. If we can dig a little further into the reasons behind the fall, we may be in a better position to decide whether the share price today represents an opportunity or not.

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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.