The recent market rally has been a most unusual one. Overall, most investors are still tepid about the general economy. This means while many are likely to have sat out of the rally, those who took part are looking for indications of a change in sentiments to reduce their holdings.
I picked up Sembcorp marine during the recent market correction as its price fell by 10% after news that its office in Brazil was raided by anti-corruption officers. I found it strange that such corruption considered rampant in Brazil could have implicated Keppel Corp but left Sembcorp unscathed.
While nothing has been proven at this juncture. Semb Marine will likely be facing a fine probably on the same scale as that of Keppel Corp, given that the contracts awarded to the yards by Sete Brasil are about the same in number (article). While it is still early days yet for any conclusion to be reached on this.
However, there are always two sides to a coin and the present Semb Marine has had more breathing space given its recent deleveraging exercise, provided by parent Semb Industries and Temasek. I also like the fact that the soon to be in force IMO Sulphur 2020 cap has meant more Sulphur scrubber installations and the progressive change to D2 standard for BWMS would likely increase the amount of business with semb Marine for this year, as they are more exposed to this sector than Keppel. Though in most likelihood will only cushion any impact from the fine should it be implicated.
Similar to First Reit, this is a turnaround play for me, as the heavy volume selling is likely to taper off soon while I wait for the market to recognize Semb Marine’s value. While more bad news may follow, I believe that the income reports for the coming 2 quarters will vindicate my thesis.
In the long term, while they have their own niches. On their own Sembcorp and Keppel are still small players in a very large offshore market. That said, their technical know-how and execution ability are still considered top rate in this industry. With the ongoing global trend of mergers for shipbuilders it would not be difficult to see how synergies can be form through a merger, especially when some of their yards are located in close proximity with each other.
Turning back to the portfolio, the equities part of the portfolio crossed the 50k milestone this month. Including the bonds part of the portfolio and my warchest I believe we should be in good stead to capitalize on any opportunities offered by Mr. Market.