When China circuit breakers triggered twice this week, STI plunged. Yes, three bank stocks and two Singapore conglomerate Keppel Corp and Sembcorp with profits mainly made up from Oil and Gas industry have their share price tanked as well. Many will reckon that this is the best time to buy these blue chips. However, did you ever wonder why these five stocks dropped more significantly than other blue chips in the Telco, Medical or Transport etc sectors?
In volatile period like this, banks will be hit the most. The worries of Non-performing loans (NPL) rise. Corporate companies with exposure in China, who borrowed US$ to fund growth during the good times without hedging the currency, will be faced with increasing debt load with the CNY devaluation now. There will be capital outflow and bonds with high yields will be de-rated to junk, causing increasingly NPL.
Furthermore, bank stocks are always subjected to lower valuation during an economic turmoil than most companies.
DBS and OCBC have PEs of 4.6 and 7.2 during the GFC. Now DBS and OCBC PEs are both 9.1 with possible downside risks of 20 – 50% still.
Ok, Singapore banks are one of the strongest in the world. I agree. But does it mean that now is a good buy?
Keppel Corp and SembCorp
Keppel Corp and Sembcorp may be near the GFC trough valuations or lower. But do you know why? I do not have to explain at which level oil price is now. Then again, how many are optimistic about oil price rally in the short term 1-3 years?
Even if oil price really soar like what oil guru, T. Boone Pickens predicted (refer here) - I personally are not discounting him, it does not mean that Kep Corp or Sembcorp Core Rig businesses will become immediate beneficiaries. Oil price increase benefits Oil Majors directly since they are at the highest of the value chain. Even with oil price surge, do you really think oil majors will then tell Rigowners or Keppel or Sembcorp that “ok, vendors, now we are going to pay you more for the same rig/vessels instantly?”
Sete Brasil Rigs
Bloomberg article has said that Petrobras’s Sete Brasil is mulling a bankruptcy filing if the current restructuring is not helping. Do you know how many rigs Keppel and Sembcorp have in orders for Sete Brasil during the boom time order in 2011/2012?
Keppel has 6 rigs – USD4.9b (current Backlog of 10b)
Sembcorp Marine has 7 rigs – USD5.6b. (current Backlog of 11b)
That is astounding 50% of the backlog for each of the company.
Do you think Sete Brasil has already paid downpayments for all of them?
Those rigs with downpayments paid, do you think Sete Brasil will continue to pay progressive payments?
If Sete Brasil cancels all the rigs, what will happen? Keppel and Sembcorp to sue Brasil government?
Even if Sete Brasil does not cancel, they will just stop paying and what will happen next?
It is likely then, Keppel Corp and Sembcorp become asset owners of these rigs and gearing will be drive up?
That is not to consider other O&G companies that can potentially cancel or postpone their contracts as well!
Ok, Keppel and Sembcorp are diversified conglomerate and not all about O&G. I agree totally and they will continue to evolve. They will definitely be able to weather this crisis, consider their track records. Moreover they can reduce their cost greatly because most of their employees' salary are variable bonuses.
Yet, the marine division of Sembcorp Industry contributes ~>40% of SCI bottom-line. For Keppel’s case, out of 1.885 bil they generated in net profit in year 2014, 1.040 bil was derived from O&G! That is >55%.
Now think again about the so-called diversification!
Do you think the forward “yield” of 5-8% dividends based on 2015 payout is still possible in 2016?
Ok, you are a long term investor!
Rolf’s Final Thoughts
During a bear, it is better to stick with stocks you are most familiar or has traded many times over the years. It gives you more mental strength during volatile movements. It is only when you are calm and experience, that you are able to make the best investment decision!
Perhaps I will possibly trade than to be a long term investor for banks and O&G stocks now. This also explain clearly why I sold Sembcorp Ind in August at S$3.3 earlier at a hefty loss of 25% anticipating the current situation - Refer here. Now the reason is obviously clearer!