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3Q21: Buy For The Outlook, Not For The Earnings

While the company continues to guide for a poor 2H21, this should not be news to the market. Overall, SMM’s 3Q21 had a number of positives including new R&U contracts, and that order visibility has improved across all segments. As at end-3Q21 and post its S$.15b rights issue, its gearing had fallen to 0.4x. Maintain BUY. Target price: S$0.11.

3Q21 BUSINESS UPDATE

• A qualitative update for 3Q21. Sembcorp Marine (SMM) released its 3Q21 business update which did not contain any revenue or profit numbers. Two of the negatives, which in our view the market is well aware of, is that 2H21 will continue to see losses being
generated, and that it continues to face labour and logistics challenges. On the positive side, the company commented that “overall order visibility across its product segments improved in 2021” and that it is currently bidding on projects worth in excess of S$10b.

• An improved financial position post S$1.5b capital raising. On the analyst call, SMM’s management commented that it has a relatively strong liquidity position with its gearing at 0.4x as at end-3Q21. Importantly, the capital raising proceeds can be used more ably to execute and complete the projects as well as for working capital needs for new orders and projects. SMM management would not be drawn on its views of its funding needs post- 2022,but did state that it does not expect any more capital raisings given that its banks can see that the overall industry is improving and that SMM is transitioning well into renewables.

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• Update on merger process with Keppel Corp (KEP SP, BUY, target price S$6.74). SMM’s management stated that while mutual due diligence has commenced, it was not able to give a definitive timeline as to when it will be completed. It said that both it and Keppel Corp (KEP) are working towards the merger with the intention to complete it “sooner rather than later”.

• R&U segment should continue its steady recovery. Following on from its 3Q21 disclosure that it had won two contracts to carry out refurbishment and revitalisation work on two cruise ships, the company stated on the analyst call that the Repairs and Upgrades (R&U) segment will continue to do well, in line with the global macroeconomic recovery post COVID-19. While these two contracts in particular were from cruise lines, it appears that the company expects growth in the R&U business for other types of vessels.

STOCK IMPACT

• Rig market commentary: SMM’s management stated that the global rig market appears to be a lot healthier compared to a year ago as utilisation rates are now above 82% for marketed rigs, while some warm- and cold-stacked rigs have been reactivated. While demand and supply appears to be approaching equilibrium, it believes that immediate enquiries may not be forthcoming. However, SMM pointed out that there has been more interest in completed or partially-completed rigs which it views as a potential precursor to new orders in the medium to long term. While SMM stated clearly on the analyst call that “drilling rigs are not (its) key immediate focus”, it is clear from the table below that global rig operators have sequentially had a much better 3Q21, with Noble Drilling in particular guiding for a significantly better 2022 relative to 2021.

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• New order flow. Orders have improved so 2022 will be better than 2021 from the management’s standpoint. This is however very much driven by customers and what they need, as well as their forecasts of commodity prices. SMM is also currently working on
orders in excess of $10b. Addressable market and both sides of the energy market have improved tremendously.

• Continued challenges at the shipyard. With COVID-19 cases in excess of 3,000 per day in Singapore, SMM has attempted to manage positive cases by having “micro sites” to lower the risk of the virus shutting down the entire Tuas yard. Thus, increased costs and negative effects on productivity are to be expected which will continue to impact SMM’s profitability in 2H21. On the labour side, welders have been difficult to recruit in the past 12 months. However, with the Ministry of Manpower recently allowing foreign labour to enter Singapore, the problematic access to labour should ease in the near term.

EARNINGS REVISION/RISK

• None.

VALUATION/RECOMMENDATION

• Maintain BUY with a target price of S$0.11. Our target price is based on a target multiple of 0.74x which is pegged to our 2022 estimated book value per share of S$0.14. Our target P/B multiple is a 30% discount to the company’s past-five-year average P/B of 1.07x. In our view, we believe this discount is a reasonable reflection of the industry risks that SMM faces for at least the next 12 months. With its S$1.5b rights issue completed, and with Temasek’s mandatory general offer at S$0.08/share having lapsed in early Nov 21, we believe that much of the corporate-level risk has dissipated.

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SHARE PRICE CATALYST

• New orders for rigs, offshore renewable installations or fabrication works.

• Meaningful return of repairs and upgrades work for cruise ships and other commercial vessels.

• Merger or JVs with other shipyards.