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2 Reasons 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 are two:

1. The presence of free cash flow in 2016 and the possibility of having growing free cash flow in the years ahead – for more, head here.

2. The emergence of favourable payment terms

As a brief background, Sembcorp Marine’s business requires it to put up working capital upfront when it wants to start building rigs for its customers. Typically, this requires the company to take up loans to tide over the period before it receives payment from its customers.

When customers pay on time, Sembcorp Marine’s business can run smoothly. But when customers are unable to pay in a timely manner – as in the case of Sete Brasil, one of Sembcorp Marine’s major customers that went bankrupt last year – this puts Sembcorp Marine in a bit of a bind. Given this dynamic, the company has been working to remedy the situation.

In Sembcorp Marine’s 2015 fourth quarter earnings briefing, the company’s chief executive Wong Weng Sun said:

“We believe that our working capital needs have peaked, and we expect to see a reduction this year [referring to 2016.]”

In Sembcorp Marine’s latest earnings briefing (for the fourth quarter of 2016), Wong reinforced his statement, saying:

“In 2016, the majority of our order book continued to be on progress payment terms. As such, besides lowering the overall credit risk profile, the need for fresh working capital to fulfil such orders has also decelerated compared to prior years.

We continue to focus on procuring new projects on progress payment terms.”

As Wong pointed out, having progress payment terms provides two key benefits for Sembcorp Marine. Firstly, it reduces the company’s overall credit profile. Secondly, it also reduces the need for fresh working capital; this in turn could help improve Sembcorp Marine’s operating cash flow.

To be sure, Sembcorp Marine was able to only secure S$320 million in new contracts for 2016. This is a far cry from the S$3.2 billion it managed to secure in 2015. 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.