Sembcorp Marine Ltd’s Stock Price Is Down 66% In 3 Years: Is It A Bargain Now?

Sembcorp Marine Ltd (SGX: S51) is one of the world’s largest oil rig builders. But being a distinguished company has not helped its stock; Sembcorp Marine’s stock price has sunk by 66% in the past three years.

And, this has happened even when Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI), has lost merely 10% in value.

Sembcorp Marine’s experience may raise the question among investors: Is the company a bargain right now? That’s not an easy question to answer. But, some clues could perhaps be found from Peter Lynch.

For those unaware, Lynch is a legendary investor who managed the US-based Fidelity Magellan fund from 1977 to 1990. In that timeframe, he achieved annualised returns of an astounding 29%. Lynch had detailed his investing exploits and philosophy in his book One Up on Wall Street. He also included a general checklist he had used when he was researching stocks.

Let’s look at the checklist to see what it can tell us about Sembcorp Marine.

1. The Price-Earnings ratio: Is it low or high for this particular company and for similar companies in the same industry (generally, low PEs are preferred)?

Sembcorp Marine’s profit over the last 12 months is a negative S$341 million, mainly as a result of S$609 million worth of write-downs and impairments made in 2015. (The sharp fall in the price of oil since mid-2014 had taken a toll on the company’s business.)

As a result, this PE ratio criterion is not very applicable for Sembcorp Marine at the moment.

2. What is the percentage of institutional ownership? The lower the better.

Lynch had added this criterion into his checklist because he felt that a lack of institutional ownership signaled neglect from the investing community, which in turn can result in better bargains. (Institutional investors are essentially big money managers).

Sembcorp Marine ticks the box here. As of 3 March 2016, there are no funds or institutional investors that individually control more than 5% of the company’s shares. Moreover, there’s very little room for institutional investors considering that Sembcorp Industries Limited (SGX: U96) – Sembcorp Marine’s parent company – controls 61.01% of the outstanding shares.

3. Are insiders buying and whether the company itself is buying back its own shares? Both are good signs.

Sembcorp Marine has bought back shares on a few occasions over the past six months, spending a total of S$2.20 million on 1.316 million shares.

4. What is the record of earnings growth and whether the earnings are sporadic or consistent?

Here’s a table of Sembcorp Marine’s earnings over the last decade from 2005 to 2015:

Sembcorp Marine profit table
Source: S&P Global Market Intelligence

You can see that the company has largely had a good track record in terms of being consistently profitable. But, like I mentioned earlier, 2015 was a tough year for Sembcorp Marine and it ended up clocking a loss.

Another negative point worth noting is the cyclicality of Sembcorp Marine’s results. The company’s profit had peaked at S$860.3 million in 2010. By 2014, this profit number had fallen by over 35% to S$560.1 million.

5. Does the company have a strong balance sheet?

It’s a straight no here. As of 31 March 2016, Sembcorp Marine has S$957 million in cash and short-term investments, S$3.90 billion in total borrowings, and shareholders’ equity of S$2.55 billion. This works out to a net-debt to shareholders’ equity ratio of 115%,which is not low.

A Fool’s take

With reference to Lynch’s five criteria, Sembcorp Marine is a company with low institutional ownership and the presence of recent share buybacks. These are the positive points. But, there are also significant negatives: The company’s profit is somewhat cyclical and it had clocked a loss in 2015; meanwhile its balance sheet is also weak at the moment, with a net-debt to shareholders’ equity ratio of 115%.

All things considered, it appears that Sembcorp Marine would not score well on Lynch’s checklist.

But, it’s also worth noting that all we’ve seen above should be taken only as useful starting points for further research on Sembcorp Marine. A deeper study is needed before any investing decision can be reached.

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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.