Sembawang Kimtrans @ 51 cts ( Marine / Singapore ) 6 comments

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Main issues

1.High forward PE valuation of 20X ex-extraordinary items

2.Limited further balance sheet leverage potential

Sembawang Kimtrans' share price has been on an upward surge since announcing an excellent set of 1H05 results, but what was a bargain at 20 cents no longer seems so at 51 cents.

The company is involved in marine logistics and integrated logistics, which account for about 60% and 40% of revenue respectively. However, it is clear that the market has been revaluing it primarily due to its positioning in the marine logistics business of transporting coal in Indonesia, which is now recognised as having strong potential given the high price of oil generating demand for alternative energy resources.

All this is very well, I agree with the underlying trend, but ultimately there is a reasonable price for everything and the current price tag for Sembawang Kimtrans seems to have gone overboard. For one, it is now trading at 24 times trailing PE, an extraordinary valuation putting it in the league of marine/offshore players with much greater scale/much better growth prospects like Labroy Marine (S$400M revenue) and KS Tech (Temasek-backed oil & gas with strong China prospects), and significantly higher valuation than Jaya (20 times PE, excellent profit margins ~50%) and Chuan Hup (whose PE is half SemKimtrans!).

Read the company's 1H05 P&L statement. The profit growth would not be as euphoric if one takes away the extraordinary gains of ~S$3.5M due to gains on vessel disposals and foreign exchange gains; the net profit would look more like S$4M, or about 1.3 cents EPS, or 2.6 cents annualised (seems logical since this industry is not really that seasonal), or 20 times forward PE ex-extraordinary items, for those who argue that trailing PE is an unfair valuation measure for a growth stock. That still seems excessive to me. Furthermore, its balance sheet suggests limited capital to fund growth: short-term + long-term debt add up to about S$60M, approximately equal to equity capital implying a gearing of 1. That is already quite aggressive and suggests it might need to go to the market to raise funding in the future.

To me, that is a possible reason why its share price has been surging up recently. Some might have noted similar phenomenons for other stocks in the past; I can remember Fu Yu and Huan Hsin just recently. Remember what happened to them after they got the money. Of course, that is purely a conjecture; however, in itself the price valuation for SemKimtrans is just unattractive for any value buyer.