Investors Take Note: There Are Troubling Signs for SembCorp Marine Ltd

Rig builder SembCorp Marine Ltd (SGX: S51) has had a rough 2015. Since the start of the year, the company’s shares have fallen by 44% to S$1.83 currently even as the broader market, represented by the Straits Times Index (SGX: ^STI), has slipped by ‘just’ 14%.

SembCorp Marine’s stock market woes this year had happened for a reason. In the first nine months of 2015, the company’s revenue and profit had dropped sharply by 17% and 36%, respectively. Earlier this month, the company even warned that it is expecting to clock a loss in the fourth-quarter of the year.

The price of oil, which has declined to around US$40 per barrel from a 2014 peak of over US$100, has made life very difficult for many companies in the oil & gas industry.

Will there be any respite coming soon for SembCorp Marine’s investors? At Sembcorp Marine’s current price, it is valued at just 9 times its trailing earnings. That’s not far from the lowest price-to-earnings (PE) ratio of 7.5 that Sembcorp Marine’s shares had reached in early March 2009 during the Great Financial Crisis of 2007-09.

Investors who bought SembCorp Marine’s shares at its crisis trough at S$1.31 could have earned outsized gains of nearly 400% over the next few years as the rig builder’s shares went on to rebound to a peak of around S$6.00 in the first-quarter of 2011.

The price of oil had also collapsed dramatically during the financial crisis period, falling from over US$140 per barrel to less than US$40. This is very similar to what’s going on now with oil.

But, there are big differences between the SembCorp Marine investors knew during the financial crisis period and the SembCorp Marine that we see now. The differentiating factors lie in SembCorp Marine’s balance sheet, accounts receivables, and revenue. The chart below illustrates these financial details going back to the third-quarter of 2006.

SembCorp Marine's accounts receivables, revenue, and net debt to equity ratio
Source: S&P Capital IQ

The yellow line shows how SembCorp Marine’s net debt (total borrowings minus cash) to equity ratio had changed over the years. As you probably can tell, the firm’s balance sheet is now more highly leveraged than it has ever been over the past nine years and this adds financial risk to the equation for the company and its investors.

Meanwhile, the grey and orange lines plot the year-on-year growth rates in SembCorp Marine’s quarterly accounts receivables and quarterly revenue, respectively. Generally speaking, sharp spikes in receivables that are not accompanied by commensurate growth in revenue may be a sign that a company’s business is facing problems.

For instance, a company may be plagued by rogue customers that are taking far longer than normal to pay the bills or that cannot/refuse to pay. This may be a scenario taking place now with SembCorp Marine. In November, the company’s customer, Marco Polo Marine Ltd (SGX: 5LY), had terminated a contract for a jack-up rig just weeks before the contractual delivery date of 30 November 2015.

During the financial crisis period, SembCorp Marine had a strong balance sheet as seen by the negative net debt to equity ratio (a negative ratio equates to the company having more cash than debt). Its quarterly accounts receivables and revenues also had roughly similar growth rates.

This time around, SembCorp Marine has a highly-geared balance sheet (as already mentioned) and has also seen its accounts receivables grow at striking double-digit percentages over the past few quarters even as its revenue has declined. Growing receivables can lead to cash flow problems and that’s not a positive development for any company, especially one that has a weakening balance sheet.

None of what we’ve seen above is meant to say that SembCorp Marine will definitely face more trouble ahead. But, what I’ve shared are troubling signs that prospective and current investors of the company may want to be aware of.

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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 companies mentioned.