2 Reasons 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 had led to lower sales and losses. 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. To top it off, SembCorp Marine reported another loss.

As investors, we should try our best to look at both sides of the coin. As we look through the wreckage, there might be a couple of brighter spots.  

1. Hello, free cash flow – click here

2. Favourable payment terms

SembCorp Marine chief executive Wong Weng Sun said that capital expenditure in the current year will be lower. He said:

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

As I noted in my previous article, lower working capital needs led to higher operating cash flow and free cash flow. There is some positive signs for the future as well. Wong said:

“The majority of our current S$8.4 billion net order book is based on progressive payment terms, with less than 20% comprising drilling rigs with back-ended payment terms.”

“As such, the need for fresh working capital to fulfil such orders in the next years is likely to continue to decrease.”

In short, Wong is saying that over 80% of its current orders will have better terms where customers will make payments as the project progresses. This reduces the amount of cash SembCorp has to pony up to support a vast majority of its projects.

For context, SembCorp Marine has a net orderbook of $8.4 billion, as of 30 September 2016. Excluding the contracts with Sete Brasil, a customer that had declared bankruptcy earlier this year, the order book would be $5.2 billion.

As I mentioned in the opening, it’s important to be aware that some of SembCorp Marine customers may have already delayed or held some of its deliveries. In the case of bankruptcies, existing payment terms might not be enforceable.  

Still, the current development is showing some signs of improvement for the company.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.