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Sembcorp Marine

Tough Times

 

Sembcorp Marine is an engineering firm in ship & rigs repair, building, conversion & offshore engineering. The firm have eight shipyards - four in Singapore, two in China, one in Indonesia and another in Brazil. 

The company started life in 1963 as Jurong Shipyard, a JV between Ishikawajima-Harima Heavy Industry and Temasek.

Acquisitions include Sembawang Shipyard, Karimun Shipyard, Bohai Shipyard and PPL Shipyard (Promet). 

A combination of oil price collapse from a high of $140 per barrel and Sete Brasil, a major customer financial distress led Sembcorp Marine to a prolonged down cycle.

Recent revival of corruption scandals investigation in Brazil continue to weigh on the company.

Financial

Revenue in FY18 increased 61% to $4.9B on delivery of 7 rigs to Borr Drilling and 1 to BOTL. However, the firm still recorded a loss of $74M due to overhead costs and sale of semi-submersible. 

 

4Q18 and 1Q19 financials showed sign of earning turnaround. However, order-book remained subdue; indicating top line is still not recovering. Perceived turnaround is likely to face headwind. 

Balance Sheet 

Her weak balance sheet is a major concern. Z-Score is signalling a company in deep distress. While a $2B loan from Temasek & Sembcorp Industries is an important lifeline; it does not resolve the critical issue of turning around the business and generating cashflow to pay off debts. 

OPINION

Trade war and tariffs is slowing global economic growth.

Global supply chains are re-inventing itself as a result of I.T. and A.I. Re-shoring and shift of manufacturing closer to home will impact shipping, hence energy demand. 

Crude Oil was chosen as an energy source decades ago because it was abundant and cheap.

In the 70s, it was used as a political tool, leading to shortage.

China economic reform pick up steam in the 90s under Jiang Zemin and Zhu Rongji leading to huge energy demand. GDP growth peaked in 2007 and oil prices started to trend down few years later. 

Today, United States is a net oil exporter and enormous effort are underway to embrace alternative renewable energy sources. 

 

Crude oil will eventually have less bite as a political tool. Demographics in developed economies and varied sources of energy, especially in future transportation will cap wild fluctuation in crude prices. 

While crude oil demand will always be with us; it will only be one of many sources of future energy.