Tuesday 23 February 2021

Sembcorp Marine- Current NAV of 29.2 cents and losses of 4.6 cents LPS

Sembcorp Marine (SCM) has released its full year results, with a loss of 4.6 cents per share (after factoring the enlarged share base). The current net asset value per share is now 29.2 cents per share. This is shown in page 8 of its financial results.

What does the Future Hold?

I am maintaining my prediction that SCM will make 1.1 cent per share loss for 2021. This is because SCM has a few contracts left and does not seem to be fully utilising its yards (However i will re-evaluate the losses post 1HFY results to gauge the company's value).

Investors can expect SCM to deliver the last 2 Transocean Drillships this year because one of them has secured a contract to start operations in the fourth quarter of 2021 with Chevron. Cost of the 2 drillships stated in Transocean report is US$1.93 billion (S$2.56 billion). With delivery in FY21, a significant portion will be recognized as revenue, which I estimate is around SGD $1 billion. With other projects and ship repairs, SCM FY21's revenue will be at least on par or better than FY20.


Assuming a full workforce rate, SCM's orderbook will last until end 2022 based on extrapolation. It is likely SCM will cut its workforce to let its orderbook last longer. 

With the offshore drilling industry now recovering and more rigs put into work, it is likely SCM will get new rig orders secured in 2022. With the market leader, Keppel O&M's exiting, SCM will be able to command good margins for future contracts especially deep water rigs where it is now unrivalled.

Energy demand is increasing quickly now due to the consumption by crypto mining/transactions and growth in data centers. While some banks are predicting a commodity upcycle, similar to the $100 oil seen in 2011-2013, I am less sanguine and expect oil to be at only $80. However, this will result in increased drilling which will support the need to order more oil rigs. 

SCM too will win orders in windfarm installation and that will be another plus point. All in all, an increase in revenue will mean lower losses and eventual profitability for SCM. 


At the current reported NAV of 29.2 cents and expected further losses of 1.1 cents (2021) with profitability from 2022, I expect SCM to have a NAV of 28.0 cents before turning its business around. Applying a 30% discount to FY22 forecasted NAV to factor for uncertainty of more losses, the fair value is 19.6 cents, or 25% higher than the current share price of 15.2 cents.

SCM also holds valuable land in Singapore in the form of the new Tuas Yard where Singapore plans to consolidate its trading activities at. The consolidation of port operations at Tuas means SCM ship repair segment will be getting the business of maintaining and repairing ships; after all Keppel Corp is also exiting this segment as well.

Should SCM turn profitable at a quicker pace, this will be a catalyst for the company to be valued at 28 cents as the certainty of continued losses is reduced.

Monday 15 February 2021

Purchase of Multi-Chem

Following from my penchant of hunting for unknown gem companies. I have chanced upon a company called Multi-Chem and had bought its stock today.

Business Profile

Contrary to its name, the company is not involved in the chemicals industry and is distributing IT security solutions products such as RSA and trend micro and training people on them. While it has a small business in mechanical drilling, this contributes to only 1% of its revenue; hence it should be focused as an IT and network solutions provider.

Being in the IT security solutions company, the company has very little CAPEX. Furthermore due to the trend of working from home, the company has seen a growth in its business. The market capitalization of the company is $124.3 million based on its closing share price today

Growth in Cash Flow

In page 6 of its latest financial results ending in 2020, the company experienced a growth in operating cashflow generated by 60% from $20 million to $32 million. Multi-chem's business in the IT security solutions has grown from $127 million in 2009 to $453 million in 2020.

With a small annual CAPEX outlay due to its model, the company generated approximately $28 million in free cashflow before working capital changes for FY20. This means its current business has the potential to yield a free cashflow yield of 22.5% based on current market cap.

With the gradual return to physical working at the office, I do not forsee that Multi-Chem will continue to grow its business but hover at around an operating free cash generation capability of $20 million. This itself is still a good free cash yield of 16%.

Strong Balance Sheet

In 2020, the company has paid off almost all of its bank borrowings (decrease from $25 million to $4.7 million debt). Its current cash reserves is $67.6 mil, and therefore has a net cash of $62.9 million which forms 50% of its market cap.

Possible Privatization Candidate

The controlling shareholders who is the CEO, owns 68% of the business. With its large cash reserves and a business capable of generating $20 million a year, it is possible a buyout may occur for the remaining 32% stake. 

Assuming a free cashflow yield of 10% and $20 million generated in free cash annually, the company can be valued at $200 million or about $2.22 per share. If investors are gung ho and think that Multi-Chem's strong growth in FY20 can be maintained due to the digital workplace trend; at FY20's free cash flow of $28 million, the business is worth $280 million or about $3.10 per share. With little debts on its balance sheet, the free cash generated by Multi-Chem's business can be sued for dividends. Hence free cash equals to potential dividends.

Multi-Chem's FY 20EPS is 19 cents, and is now trading at low P/E ratio of 7.2x.