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Is Sembcorp Industries Limited a Bargain Stock Currently?

Photo credit: Rafael Matsunaga. Licence: http://creativecommons.org/licenses/by/2.0/

Marine engineering and utilities conglomerate Sembcorp Industries Limited (SGX: U96) is one of the largest companies in Singapore’s stock market given that it is one of the 30 constituents of the market barometer, the Straits Times Index (SGX: ^STI).

As such, it may be on the radar of many investors, with some of them perhaps wondering: Is Sembcorp Industries possibly a bargain stock right now?

There’s no easy answer, but we can get some help from the legendary investor Peter Lynch’s classic investment text, One Up On Wall Street.

Lynch is an investor worth learning from. As head of the US-based Fidelity Magellan Fund from 1977 to 1990, he produced annualised returns of an incredible 29%. In One Up On Wall Street, Lynch shared a general checklist he had used when he was studying companies. Let’s look at how Sembcorp Industries fares against the checklist.

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)?

At its current stock price, Sembcorp Industries has a PE ratio of 15.4. As the chart below shows, this PE ratio is near a five-year high:

Sembcorp Industries' PE ratio over past 5 years
Source: S&P Global Market Intelligence

The slight saving grace here is that the company has a nearly identical PE ratio with marine engineering and property development conglomerate, Keppel Corporation Limited (SGX: BN4).

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

This criterion was added by Lynch because he thought that companies that were not noticed by institutional investors (big money managers) tended to make for better bargains.

In Sembcorp Industries’ case, it has a high level of institutional ownership. Temasek Holdings, one of the Singapore government’s investment arms, has a 49.5% stake in the company as of 1 March 2017.

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

Lynch thinks they are good signs because they could be a signal that a company’s management sees the shares as undervalued.

Over the past six months, Sembcorp Industries has bought back shares of itself on at least 17 different occasions.

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

The table below shows Sembcorp Industries’ earnings per share from 2006 to 2016:

Sembcorp Industries EPS table
Source: S&P Global Market Intelligence

Although the conglomerate has consistently generated positive earnings, growth hasn’t been smooth. In fact, Sembcorp Industries’ earnings per share had declined by 34% and 32% in 2015 and 2016, respectively.

5. Does the company have a strong balance sheet?

As of 31 December 2016, Sembcorp Industries has total debt of S$9.22 billion but cash of just S$1.88 billion. With shareholders’ equity of S$5.90 billion (excluding perpetual securities), the company thus has a net-debt to shareholders’ equity ratio of 124%. That’s not low at all and isn’t what a strong balance sheet looks like to me.

A Foolish conclusion

In sum, there are a few positives with Sembcorp Industries: The company has been consistently profitable and has been buying back its own shares. But, there are also some strong negatives, such as its high PE ratio, high level of institutional ownership, lack of earnings growth, and weak balance sheet.

Given all these, it’s unlikely that Lynch would be too interested in Sembcorp Industries at the moment. But in any case, it’s worth noting that all we’ve seen above about Sembcorp Industries should only be taken as useful starting points for further research.

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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 owns shares in Keppel Corporation.