1 Reason For Investors To be Optimistic About Sembcorp Marine Ltd

Sembcorp Marine Ltd (SGX: S51) has had a rough 2016.

The oil rig builder saw its shares shrink by around 20% in the year. It also found itself having to deal with the bankruptcy of a major customer, the Brazil-based Sete Brasil. In addition, the company’s revenue declined by more than 28% in 2016 as it grappled with lower customer demand.

But Sembcorp Marine’s stock has risen by around 45% since the start of 2017. There may be a few reasons why investors are feeling a little bit more optimistic about the company. Here’s one: The presence of free cash flow in 2016 and the possibility of having growing free cash flow in the years ahead.

Hello, free cash flow

Sembcorp Marine’s free cash flow deteriorated in 2014 and 2015. The graph below gives a summary of the oil rig builder’s operating cash flow, capital expenditure, and free cash flow over the past 10 years.

Sembcorp Marine operating cash flow, capital expenditure, and free cash flow from 2006 to 2016 (2)
Source: S&P Global Market Intelligence

For 2014 and 2015, the fall in Sembcorp Marine’s free cash flow can be traced to two main factors.

Firstly, operating cash flow fell into negative territory. Secondly – and to exacerbate the issue – capital expenditure also started rising from 2011 onwards. These led to negative free cash flow between 2014 and 2015, which may have had an impact – Sembcorp Marine cut its dividend in 2015 and then lowered its pay-out again in 2016.

Fortunately for Sembcorp Marine, its operating cash flow improved in 2016. Wong Weng Sun, the company’s chief executive officer, noted the improvements in 2016’s operating cash flow in Sembcorp Marine’s 2016 fourth quarter earnings briefing:

“For FY2016, the Group generated a positive S$669 million of Operating cash flows, compared with a negative S$867 million for FY2015. Such improvement was attributed to successful deliveries of key projects and achievement of scheduled milestones for projects under execution.”

In March 2016, I wrote about possible improvements in Sembcorp Marine’s free cash flow situation. In my article, I shared some recent (recent back then) comments that Wong had made:

“On capital expenditure, as shared earlier, a large part of our new yard capex has been incurred. Going forward, we will only proceed with yard capex that are needed for execution of our secured contracts, while deferring non-essential capex.”

Indeed, Sembcorp Marine’s capex fell from around S$933 million in 2015 to S$421 million in 2016. Wong also highlighted this in the latest earnings briefing:

“Capital expenditure for 2016 was lower by more than 50% compared with the previous year. As shared earlier, with most of our new yard capex behind us, we expect capex to continue to trend downwards in the foreseeable years.”

The combination of better operating cash flow and lower capex led to SembCorp Marine churning out positive free cash flow in 2016 for the first time since 2013. Wong also said that the company’s capex will continue to decline in the years ahead.

To be sure, Sembcorp Marine’s balance sheet still has a net debt position of S$2.93 billion at the end of 2016. We will have to see what 2017 brings.

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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.