SembCorp Marine Ltd Is Near A 52-Week Low Now: Is It A Bargain?

The past year hasn’t been kind to Singapore’s stock market as the Straits Times Index (SGX: ^STI) has slipped by around 13% from 1 December 2014 to 1 December 2015.

But if you thought that was bad, there have been companies that have fared even worse. One such firm is rig-builder Sembcorp Marine Ltd (SGX: S51).

As of the time of writing (10:07am), Sembcorp Marine’s shares are down by 4.9% for the day at S$1.96. That price is just a hair’s breadth higher than a 52-week low of S$1.95 and also represents a decline of over 30% from a 52-week high of S$3.33 that was reached in late December 2014.

SembCorp Marine, which is majority-owned by SembCorp Industries Limited (SGX: U96), is a global player in the offshore and marine industry. It helps build rigs, floaters, and offshore platforms and also provides repair and upgrade services.

With that, let’s dig into some of the possible reasons behind Sembcorp Marine’s dreadful plunge in share price over the past 12 months:

1) Weak business environment for the oil & gas industry

With the price of oil crashing from more than US$100 per barrel in mid-2014 to below US$50 currently, global capital expenditures by upstream oil producers (SembCorp Marine’s customers) have dried up considerably.

Low oil prices have also made the drilling and production of oil less economically attractive, thus causing some of SembCorp Marine’s customers to defer or seek to defer the delivery of rigs.

It’s anyone’s guess as to when the price of oil will recover, but with oil stockpiles in the U.S. growing, I don’t think the situation will improve anytime soon. .

2) Unforeseen cancellation of orders

SembCorp Marine had recently suffered a rig contract cancellation from ship charterer Marco Polo Marine Ltd (SGX: 5LY).

The two companies are currently in dispute over the cancellation. Marco Polo thinks that the rig in question wasn’t up to standard whereas SembCorp Marine thinks that Marco Polo had cancelled with an intention to avoid paying the stipulated sums. SembCorp Marine also considers Marco Polo’s actions to constitute a “repudiatory breach” of the contract.

The saga is ongoing, but what may be spooking investors is this: Is Marco Polo’s contract cancellation the first of others to come?

3) Poor business performance

In SembCorp Marine’s recent fiscal third-quarter earnings release, its quarterly revenue and profit had suffered year-on-year declines of 34% and 77% respectively.

Moreover, the company’s balance sheet had also deteriorated considerably compared to a year ago. To that point, SembCorp Marine had ended 30 September 2015 with a net-debt (total debt minus total cash) position of S$2.02 billion and this compares with a net-debt position of just S$90 million on 30 September 2014.

But that’s not all. Yesterday evening, SembCorp Marine had issued a profit guidance, warning that it is “expected to record a net loss for the fourth quarter ending 31 December 2015… and a significant decline in the net profit for the full year ending 31 December 2015.” The profit guidance is also likely the reason behind the 4.9% deline in SembCorp Marine’s shares today.

Foolish Takeaway

Falling or low stock prices may make shares look like bargains, but investors should not focus solely on that. It is crucial that we perform due diligence and determine if a share’s underlying business fundamentals are still intact and if its valuation makes sense at current prices.

With regard to SembCorp Marine, investors have little to rejoice given the flurry of bad news surrounding the company. While the firm can’t control external factors like the price of oil, it can find ways to shore up its balance sheet in order to maximise its chances of surviving the current downturn. Is SembCorp Marine’s management team up to it? That will be something that is worth watching by investors.

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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 James Yeo doesn’t own shares in any companies mentioned.