1 Reason to be Optimistic About SembCorp Marine Ltd

SembCorp Marine Ltd (SGX: S51) has had a tough two year streak, to say the least.   

The rig builder has seen its shares shrink by over 50% since the start of 2015. In 2015, lower oil prices has led to lower sales and higher losses for the company. On top of that, SembCorp Marine has to deal with the bankruptcy of its major customer, Sete Brasil.

In the latest quarter, there was more bad news. Another customer, Perisai, declared its insolvency . The delivery of the rigs to Perisai will likely be on hold. Elsewhere, another troubled customer, Oro Negro, had three rigs deferred. All these made SembCorp Marine reported another loss-making quarter.

As investors, we should try our best to look at both sides of the coin. As we look through the wreckage, there might be one of bright spot.  

Hello, free cash flow

SembCorp Marine’s free cash flow has steadily deteriorated over the past few years. The graph below gives a summary of its operating cash flow, capital expenditure and free cash flow in the past ten years.

OCF FCF Capex SembCorp Marine

Source: S&P Global Market Intelligence

The fall in the free cash flow has been down to two main factors. Firstly, operating cash flow has fallen into negative territory in the past two years. Meanwhile, capital expenditure has also risen, exacerbating the free cash flow situation. The negative number may have had an impact; SembCorp Marine cut dividend in 2015.  

However, in the latest quarter, SembCorp Marine reported a positive free cash flow.

Earlier this year , SembCorp Marine chief executive Wong Weng Sun said that working capital in the current year will be lower. He said back then:

“We believe that our working capital needs have peaked, and we expect to see a reduction this year.”

For the latest quarter, changes in working capital amounted to a $726 million gain. This, in turn, has led to higher cash flow from operations. Sembcorp Marine brought in net cash flow from operations of $765 million and clocked $83 million in capital expenditure. This gave Sembcorp Marine positive free cash flow of $682 million.

As a result, the rig builder’s balance sheet also improved compared to the previous quarter. As of 30 September 2016, the company has $1.5 billion in cash and equivalents and $4.1 billion in borrowings. 

To be sure, SembCorp Marine still has a lot of hurdles in front of it. But having free cash flow is a step in the right direction. We will have to check in again in the next quarter to see whether the positive free cash flow continues into the coming quarters.

To keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.