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After A 12% Gain Over The Past Year, Is There More Room To Run For Sembcorp Industries Limited?

Over the last 12 months, marine engineering and utilities conglomerate Sembcorp Industries Limited (SGX: U96) has seen its stock price gain 12% to S$3.06 currently.

Given the respectable run-up, investors may be wondering: Is there more room left to run for Sembcorp Industries’ stock? There is no easy answer, but we may be able to find some clues from an investing checklist that the legendary investor Peter Lynch shared in his book One Up On Wall Street.

Lynch ran the US-based Fidelity Magellan fund from 1977 to 1990 and racked up an incredible annualised return of 29%. In One Up On Wall Street, Lynch wrote about a general checklist he had used when he was searching for investing opportunities. Let’s run Sembcorp Industries through the checklist and see what turns up.

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)?

Right now, Sembcorp Industries has a PE ratio of 17.5. The chart below shows the company’s PE ratio over the past five years, and you can see that Sembcorp Industries’ current valuation multiple is near a five-year high. This suggests that the company’s PE is high.


Source: S&P Global Market Intelligence

For another perspective, we can look at the PE ratios of Keppel Corporation Limited (SGX: BN4) and Singapore Technologies Engineering Ltd (SGX: S63). Comparing Sembcorp Industries with Keppel Corp and ST Engineering is not apples-to-apples, since Keppel Corp is a marine engineering and property development conglomerate, while ST Engineering is an engineering conglomerate with a relatively small interest in marine engineering. But, looking at the PE ratios of the three companies can still give us more context.

At the moment, Keppel Corp and ST Engineering have PE ratios of 16.5 and 19.9, respectively. This suggests that Sembcorp Industries’ PE ratio is reasonable.

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.

According to Sembcorp Industries’ 2016 annual report, it has a high level of institutional ownership. As of 1 March 2017, Temasek Holdings held 49.53% of the conglomerate’s shares. Temasek is one of the Singapore government’s investment arms, and is also one of the largest sovereign wealth funds in the world.

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

Over the past six months, there have been no instances of insider buying, or the company repurchasing shares.

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

Here’s a record of Sembcorp Industries’ earnings per share over the past decade from 2006 to 2016:


Source: S&P Global Market Intelligence

We can see that Sembcorp Industries has been consistently generating profits for a long time. But, it’s also worth noting that the conglomerate’s profits have been declining. In fact, its earnings per share in 2016 was 56% lower than in 2011.

5. Does the company have a strong balance sheet?

Based on its latest financials as of 30 September 2017, Sembcorp Industries had S$2.114 billion in cash and equivalents, but a much higher S$10.018 billion in total debt. That’s not what a strong balance sheet looks like.

Moreover, Sembcorp Industries has generated a total of just S$187.5 million in operating cash flow from 2014 to 2016, according to data from S&P Global Market Intelligence; in the first nine months of 2017, the company’s operating cash flow was a negative S$90.5 million. Sembcorp Industries’ current inability to generate healthy streams of operating cash flow makes its high net-debt position risky.

A final take

On the positive side, Sembcorp Industries has a PE ratio in line with similar companies, and a good record in generating profits over the long-term. On the negative side, the conglomerate has a PE ratio that’s near a five-year high, a high level of institutional ownership, a lack of insider buying and buybacks, a decline in profits over the long-term, and a weak balance sheet.

Judging from the results of the checklist, it is likely that Lynch would not be interested in Sembcorp Industries right now. But, it’s worth noting that Lynch’s checklist, as useful as it may be, should only be seen as an informative starting point 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.