The 1 Thing About Sembcorp Marine Ltd That Should Worry Investors

Investors looking for a bargain right now will likely have come across the blue chip stock Sembcorp Marine Ltd (SGX: S51). At its current price of S$1.75, it has a number of traits which bargain hunters may like to see.

Firstly, S$1.75 represents a 52-week low and a 47% decline from a 52-week high of S$3.33.

Secondly, the rig-builder is valued at just 8.7 times its trailing earnings, which is a fair bit lower than the SPDR STI ETF’s (SGX: ES3) price-to-earnings (PE) ratio of 11.6; the SPDR STI ETF happens to be an exchange-traded fund that closely mimics the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI).

Lastly, Sembcorp Marine’s PE of 8.7 at the moment is not far from the company’s lowest PE of 7.5 during the Great Financial Crisis of 2007/09. In other words, investors are close to getting what looks to be a stiff bargain.

When Sembcorp Marine reached that low PE of 7.5 on 2 March 2009, its price was just S$1.31. An investor who bought it back then could have pocketed gains of as much as 358% over the next few years given that the shares had peaked at S$6.00 in the first-quarter of 2011.

During the crisis period, the price of oil had crashed from above US$140 per barrel to below US$40. This is very similar to the current scenario in which a barrel of oil has fallen from over US$100 in price in mid-2014 to US$40 today. In the 2008-09 oil crash, Sembcorp Marine had survived admirably. In fact, its profit even managed to grow from S$238 million in 2006 to S$700 million in 2009.

These might give investors some comfort that when the current mayhem in the price of oil is over (after all, the price of oil did manage to recover after the 2008-09 crash), Sembcorp Marine’s shares will be a handsome beneficiary.

But, the Sembcorp Marine of yesteryear is quite the different beast from what it is today. Why? The rig-builder’s balance sheet can provide some answers.

Sembcorp Marine's net-debt to equity ratio
Source: S&P Capital IQ

The chart above plots Sembcorp Marine’s net-debt to equity ratios since the third-quarter of 2005, where net-debt refers to total debt minus total cash. (If there’s a negative net-debt to equity ratio, it’d mean that Sembcorp Marine has a strong balance sheet with more cash than debt).

You can see from the chart that Sembcorp Marine had spent most of the period under study (including the financial crisis era) with a rock-solid balance sheet. Unfortunately this is no longer the case – over the past few quarters, Sembcorp Marine’s balance sheet has deteriorated markedly, so much so that its net-debt to equity ratio of 2.7% in the third-quarter of 2014 has become 64% today.

In the financial crisis days, there was little financial risk for Sembcorp Marine to fret over given its strong balance sheet. But, the rig builder’s addition of significant debt to its balance sheet in recent quarters has altered its risk profile drastically. That’s one thing about Sembcorp Marine that you may want to think about carefully if you’re digging into it as a potential investing opportunity.

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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 Chong Ser Jing doesn't own shares in any company mentioned.