Share Price Catalysts Still In Play; Increase Target Price To S$0.13
SMM’s share price has seen stellar performance this year, rising 42% ytd. We believe
that there remain catalysts for the stock to continue its re-rating, with disclosure of
merger terms with Keppel Offshore Marine and new order wins being the main nearterm ones. In our view, SMM is a turnaround story with its recent large order win
possibly presaging more positives on the new order win front, especially in the
renewables sector. Maintain BUY. Raise target price to S$0.13 (S$0.11 previously).
WHAT’S NEW
• Near- and medium-term share price catalysts. Despite Sembcorp Marine’s (SMM) 42%
share price increase ytd that easily outperforms the STI’s rise of 8%, we believe that the
stock continues to present near- to medium-term upside. In our view, this would be driven
primarily by: a) the disclosure of the merger terms with Keppel Offshore Marine by 30 Apr
22, and b) new order wins for oil & gas production assets and/or renewable industry assets.
From a top-down perspective, a merger will create a more competitive and larger scale
offshore construction company that could be on the cusp of a turnaround in profitabilty.
• Quantifying the upside. Our estimates continue to project a slight loss for SMM in 2022,
and while Bloomberg consensus currently forecasts much larger losses for the company, we
highlight that some of these loss forecasts for 2022 and 2023 have been scaled back in the
past two months (see chart overleaf). However, should the company win more orders, the
earnings turnaround story for 2023 could become more compelling over the next six months.
In the meantime, we note that SMM’s past five-year average P/B (excluding peak in 2019) of
1.1x implies a valuation of S$0.143/share, while its past 10-year average of 1.5x would
translate to a valuation of S$0.189/share.
• Recent announcement of SMM’s first new order win is a step in the right direction. On
23 Mar 22, SMM announced that it had won a construction contract for a Wind Turbine
Installation Vessel (WTIV) from Maersk Supply Services which we conservatively estimate is
worth around S$650m. Construction will start in 4Q22 with delivery of the vessel slated for
2025 with payments dependent on milestones. Note that this is SMM’s first contract win
since its announcement of modification work for a Floating Production Storage and
Offloading vessel in Brazil in Jun 21.
STOCK IMPACT
• Wind turbines will get larger… According to Rystad Energy, wind turbine sizes have risen
from an average of 3MW in 2010 to 6.5MW today, with the largest currently being 10MW. As
can be seen in the RHS chart, turbines larger than 8MW accounted for around 3% of global
installations during 2010-21; however, Rystad forecasts that this will surge to >50% by 2030.
• …but the industry appears to be playing catch-up to this demand. According to Rystad,
vessels built as recent as a few years ago are already becoming outdated as turbines grow.
This has made vessel owners reluctant to commit capex to building new vessels that could
face lower-than-expected demand once they come out of the yard, especially considering
that costs for the larger-sized vessels are now in excess of US$300m-500m. At present, the
industry estimates that there are around 11 vessels under construction with cranes capable
of lifting more than 2,000 tonnes for >14MW turbines, which does not appear to be enough
considering the explosive growth forecast in the chart on the RHS.
• Spending on fossil fuels will increase in 2022 with recent industry estimates forecasting a
16% yoy increase in capital and operational expenditure to US$1.1t for the upstream oil &
gas sector. However, this is still short of the previous peak of nearly US$1.4t in 2014. Part of
this increase stems from increased project costs which, compared to 2020 levels, have risen
by 10-20%, due largely to steel prices and a tight market for equipment and labour according
to Rystad. Nevertheless, with higher observed utilisation and day rates for offshore assets
globally, we believe this should benefit SMM in the medium term, especially for production
assets.
EARNINGS REVISION/RISK
• No changes to earnings.
VALUATION/RECOMMENDATION
• Maintain BUY with an increased target price of S$0.13. This is based on a target multiple
of 1.0x, pegged to our aggregate 2022 and 2023 estimated book value per share. With its
S$1.5b rights issue completed, and 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.
• Is SMM a beneficiary of recent oil price strength? In our view, SMM is a second
derivative beneficiary of stronger oil prices as it needs upstream oil & gas companies to
respond to the higher oil prices by placing orders for either exploration or production assets
(preferably both). Given that the forward Brent oil price for delivery in Dec 27 is currently at
US$75.20/bbl, we should expect upstream capex to resume in the near term. On a 10-year
basis (see chart on RHS), there was a close correlation between the Brent oil price and
SMM’s share price up until 2018. However that correlation appears to have broken down as
new order wins dried up from 2018 onwards with SMM’s share price languishing until
recently. We also highlight that going forwards, we should expect less correlation between
oil price and SMM’s share price as the company becomes increasingly geared towards the
renewables segment.
SHARE PRICE CATALYST
• New orders for rigs, offshore renewable installations or fabrication works as well as repairs
and upgrades work for cruise ships and other commercial vessels.