Why Sembcorp Marine Ltd May Have Just Become An Even Riskier Stock

Last week, oil rig builder Sembcorp Marine Ltd (SGX: S51) released its 2015 annual report. The report contained information that points to the possibility of the company’s risk profile having deteriorated since the end of 2014.

The information in question is the company’s level of customer concentration. According to the 2014 annual report, Sembcorp Marine had only one customer which accounted for over 10% (the actual figure was 11%) of the firm’s total revenue that year.

In the 2015 annual report, it was revealed that the level of customer concentration had increased; Sembcorp Marine stated that two customers had collectively accounted for “approximately” 26% of its total revenue in 2015.

A high level of customer concentration is a risk to note. Just think of what would happen to a company’s business if it only had a handful of customers and one or two of them collapse or decide to walk away?

At the moment, the risk of Sembcorp Marine’s customers walking away or collapsing is heightened due to the troubles in the oil & gas industry. The business-health of Sembcorp Marine’s customers have links to the price of oil. And unfortunately, as some of you would know, the fuel’s price has crashed by over half from more than US$100 per barrel in mid-2014 to around US$40 today.

In Sembcorp Marine’s earnings release for the fourth-quarter of 2015, the company commented that “several of [its] customers have requested for delivery deferments in light of delays in chartering out their rigs.” Meanwhile, one of Sembcorp Marine’s key customers, the Brazilian oil & gas company Sete Brasil, is currently in danger of declaring bankruptcy.

To potentially add to Sembcorp Marine’s woes, I don’t think the company’s balance sheet is in the best of shape at the moment. The chart below plots Sembcorp Marine’s net-debt to equity ratio (where net-debt refers to total loans and capital leases minus total cash and short-term investments) at the end of each quarter from the last-quarter of 2005 to the last-quarter of 2015:

Sembcorp Marine's quarterly net-debt to equity ratio since last-quarter of 2005
Source: S&P Global Market Intelligence; author’s calculations

As you can see, the state of Sembcorp Marine’s balance sheet appears to have deteriorated markedly over the past few quarters as alluded to by the rising net-debt to equity ratio. Moreover, the ratio is now at an elevated level of just over 100% (it’s actually 103%) and is also at the highest it’s been over the past decade.

Now, all that you’ve seen above about Sembcorp Marine should not be taken as a guarantee that the company will definitely run into trouble in the future. But, a high level of customer concentration and a weak-and-deteriorating balance sheet can possibly be a toxic combination for a company. As such, they may be things that current and prospective investors of Sembcorp Marine may 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 Chong Ser Jing doesn't own shares in any companies mentioned.