Keppel Corp, Sembcorp Ind and Sembcorp Marine – to sell or not to sell?

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The three musketeers had their glory days back in the last bull cycle (2001-2008) where oil & gas was a hot industry. Many Singaporeans have bought into their glory but the stocks have never gone back to the highs, not even with the help of the recent bull run. You might be still holding onto these stocks. In this article we will delve deeper into the three companies and hope you can get more information before deciding your next move.

Chapter 1: The Past

These 3 companies used to be darlings of the Singapore stock market as their share price have been performing well and the dividends were attractive.

During the period from 2010 to 2014, the oil price was trading at USD 80 – USD 100 per barrel. However, since 2014, US shale oil has created a boom in crude oil production. That created a huge supply shock to the oil market. US used be an oil importing country, but it became an oil exporting country due to the increase in shale oil production. This created structural changes to the entire oil and gas industry, allowing US to be the top producer in the world!

(Quick explainer: Shale oil is just a type of oil that can be extracted from on shore with new technology. The extraction cost is lower than that of the oil that extracted from deep water.)

Since 2014, oil price has tanked to below USD 80 per barrel and has been hovering around USD 40 to USD 60 per barrel. This is due to weak demand from the market coupled with the increase in supply from shale oil.

Crude oil futures in the past 10 years

With the drop in oil price, share prices for these 3 companies have dropped significantly as well since 2014.

This is mainly due to the drop in profit from the offshore and marine (O&M) business segment. As you can see in the charts below, the profits from O&M comprised only 1% of the total profits for Keppel and there was even a net loss from O&M business for Sembcorp Ind in 2019. (Sembcorp Marine business is 100% from O&M).

Given the drop in oil price and O&M business, the financial ratios for all three companies have been deteriorating.

Net Debt-to-Equity has risen.

Net Debt-to-Equity20142019
Keppel Corp12%87%
SembCorp Ind56%153%
SembCorp Marine22%197%

Earnings Per Share has gone down.

Keppel Corp$1.04$0.39
Sembcorp Ind$0.44$0.12
Sembcorp Marine$0.27-$0.07

Dividends Per Share declined in tandem.

Keppel Corp$0.48$0.20
Sembcorp Ind$0.16$0.05
Sembcorp Marine$0.13Nil

Chapter 2: The Present

As of 17 March 2020, WTI Crude Oil futures dropped further to USD 29.42 per bbl. This was due to the price war between Saudi Arabia and Russia and expected lower demand due to the COVID – 19 pandemic. Some analysts are projecting that oil price could range between USD 30 to USD 40 for these two years. This low oil price will definitely suppress the share prices for these companies in the near future.

In terms of valuation, we can split the historical average price-to-book ratio (PB) into two periods, 2010 – 2014 and 2014 – 2019:

Av. PB 2010-2014Av. PB 2015-2019Current PB
Keppel Corp2.131.080.7
Sembcorp Ind1.920.920.41
Sembcorp Marine3.561.610.71

Based on the price to book ratio as of 17 March 2020, the valuation is definitely below the historical valuation. However, given the current market uncertainty and expected low in oil price for the next few years, it makes sense for the valuation to be lower than the historical numbers.

Chapter 3: The Future

One positive news is that there might be a possibility of restructuring among the three companies if the partial offer deal by Temasek on Keppel Corp is successful. (Read here for the partial offer deal). It is not the first time that we have heard about the restructuring of the O&M business in Singapore.

The main obstacle is probably that Temasek does not have a controlling stake in Keppel Corp and hard to push proposals since other shareholders may object. If this partial offer deal is successful, Temasek would have more power and influence to work with Keppel’s board to undertake a strategic review of its business.

CompanyTemasek Ownership
Keppel Corp21.18%
Sembcorp Ind49.45%
Sembcorp Marine60.98%

Do note that the deal may or may not be successful. There were conditions to the deal such as the financial performance of Keppel Corp must not deteriorate by 21 Oct 2020. The deal is also subjected to the authorities and shareholders’ approval, and only if Temasek can have a controlling interest of 51% after the deal is closed.

What is the fair value?

It is a bit tough to determine the fair value for these three companies given the uncertainty in oil prices and the restructuring possibility. Assuming that the partial offer by Temasek at $7.35 for Keppel Corp is successful, at share price of $5.20 for Keppel Corp, the market price for the remaining % of shareholding not offered by Temasek will be at $4.29 ($5.20 – (51% – 21.18%)*$7.35 ) / ( 1 – (51% – 21.18%) ) (I will skip the explanation here as this might be too technical.)

Here’s my personal view: As I am not optimistic on the O&M business, I will add an arbitrary discount factor of 20% for Keppel Corp, 30% for Sembcorp Ind and 50% for Sembcorp Marine. By using the historical PB ratio, the values would be:

Av PB 2015-2019Current PBCurrent PriceDiscount FactorFair ValueUpside
Keppel Corp1.080.704.2920%$5.3124%
Sembcorp Ind0.920.461.6130%$2.2741%
Sembcorp Marine1.610.710.7550%$0.7514%

To round it up, two key catalysts are needed for the share prices to move up. First, the restructuring. Second is the recovery in oil price. Even though there can be some upsides from the current prices, they are highly uncertain. I will prefer to avoid investing in O&M stocks now.

Should you hold or sell? These 3 questions can guide you:

  1. Do you believe that the partial offer by Temasek on Keppel share will go through and there will be restructuring in O&M business with Sembcorp? If no, sell.
  2. Do you believe that the oil price will recover to USD 80? If no, sell.
  3. Do you believe that these companies will survive during this correction? If no, sell.

This is not an exhaustive list and you may have your own reasons or strategies to decide how you buy and sell. But I thought it could give you some pointers to think about. Good luck!

8 thoughts on “Keppel Corp, Sembcorp Ind and Sembcorp Marine – to sell or not to sell?”

  1. Thank you Mr Koay.
    The above article is a good and precise update on the industry.
    My humble input is that unless the major players develop some new markets while holding on for a newbuilding recovery they can be left out of the new game with fossil fuels gradually losing favor with the newer investors. Though demand for O& G will stay for sometime, and which i think will be prolonged by current level of prices n oversupply, the writing is on the wall.

    Best regards

  2. The management of these two corporations knew and have been trying to diversify their business products/services.
    This approach should be helpful in increasing their respective values.
    I believe the govt will support them

  3. I was once a shareholder of Keppel. 12 years ago it was a darling and a pillar of the Singapore economy. Now… not so much

    Agree with you that these stocks are to be avoided for now


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