Is The Worst Yet To Come For SembCorp Marine Ltd?

SembCorp Marine Ltd (SGX: S51) could possibly be the worst performer today among the 30 constituents of the Straits Times Index (SGX: ^STI) with its shares have fallen close to 5% to S$1.96 at the time of writing (1:00 pm).

The stiff decline came after SembCorp Marine had issued a profit warning yesterday evening, stating that it is expecting a net loss in the fourth-quarter of 2015. The company cited a challenging business environment and multiple project deferments as the cause of its poor performance.

SembCorp Marine’s latest development might not have come as a surprise for some investors, given the huge drop in oil prices since the beginning of the year.

Moreover, the company has also seen its accounts receivables from customers increase by more than 46% from the end of 2014 to the third-quarter of 2015 even while revenue had declined. My Foolish colleague Chong Ser Jing had also flagged SembCorp Marine’s ballooning receivables as a risk to note earlier last month.

Here’s a table (click to show larger image) showing how SembCorp Marine’s revenue, accounts receivables, and a number of related ratios had changed over the past few quarters:

SembCorp Marine - table for revenue and accounts receivables

Source: S&P Capital IQ

If we take a look at the company’s receivables turnover days (how long it takes the company to collect its receivables) over the past few quarters, we are able to see how rapidly the situation has deteriorated.

At the end of 2014, SembCorp Marine took slightly more than 3 months (105.82 days) to collect its receivables. However, at the end of the third-quarter of 2015, the days required had ballooned to nearly 8 months (238.16 days).

The above is an indication that more and more of SembCorp Marine’s customers are deferring their payments. If the reason for the phenomenon is because SembCorp Marine’s customers are facing financial difficulties, the risk that some of SembCorp Marine’s receivables will become bad debt has increased significantly.

The recent high-profile case of Marco Polo Marine Ltd (SGX: 5LY) terminating its jack-up rig contract with SembCorp Marine can be a good instance of the issues I had described earlier. Instead of paying overdue fees (around US$21.4 million) that amount to 10% of the contract’s value, Marco Polo had opted to terminate the contract in mid-November when the rig was just two weeks away from being delivered.

Is the Marco Polo case the first of many similar instances to come for SembCorp Marine? More importantly, with the company’s strained balance sheet (it had a net-debt position of S$2.0 billion as of 30 September 2015), can SembCorp Marine withstand any more contract disputes without having to undertake any massive exercises to bolster its finances? These are things that current and prospective investors of the company might want to think about.

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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 writer Stanley Lim doesn't own shares in any companies mentioned.