Felicia Tan Wed, Jun 22, 2022
UOB Kay Hian analyst Adrian Loh is keeping his “buy” call on Sembcorp Marine (SembMarine) with an unchanged target price of 15.6 cents after the company posted a new order win worth $200 million from the Brazilian Navy on June 14.
The latest win would result in a net orderbook of $1.95 billion, up from SembMarine’s net orderbook of $1.75 billion as at end-1QFY2022.
While the order win was expected, it still underscores the company’s continuing positive momentum, says Loh in his report on June 22.
As such, the analyst says he expects more conventional and renewables orders in the near to medium term.
Out of the 17 projects that SembMarine is currently working on, the company is scheduled to deliver 12 of them in 2022. With six of the 12 projects already delivered, Loh expects the company to see better operating cash flow and a “meaningful narrowing of losses” compared to its results seen in the 1HFY2021.
“In its announcement, the company guided for [its] 1HFY2022 results to be ‘significantly better’ y-o-y,” notes Loh. “SembMarine highlighted that as at end-1QFY2022, its net debt/equity had improved to 0.38x compared with 0.49x in end-2021.”
Merger to form ‘larger and more competitive entity’
On SembMarine’s upcoming merger with Keppel Offshore & Marine (Keppel O&M), the merged entity, if successful, will “create a pure-play company with the depth and breadth of engineering and operational capabilities that can compete on a greater scale,” says Loh.
The merged company should also have much stronger financials and human resources needed to undertake the necessary research and development (R&D) to compete effectively on the global stage, the analyst adds.
“According to SembMarine, the pro forma position as at Dec 31, 2021, would see the combined entity have over 50 projects worth about $6.4 billion, 2021 revenue of $3.9 billion, not to mention a strong balance sheet,” Loh writes.
“In addition, we highlight that previously loss-making assets such as Floatel and Dyna-Mac, as well as Keppel’s legacy rigs, were left out of the combined entity, thus dodging potential integration issues in the future,” he continues.
Should the merger talks fail to win shareholders’ approval, however, Loh still sees both companies resuming talks to tweak some or all of the terms. That could take at least another six to 12 months to complete, he says.
SembMarine to garner new orders in 2022
To this end, Loh sees SembMarine focusing on garnering new orders in 2022 and adding to its orderbook with the merger terms with Keppel O&M largely in place.
“Our target book-value multiple for SembMarine of 1.2x reflects our confidence that it will garner such order thus leading to positive share price performance,” he says.
Moving forward, the analyst is expecting to see SembMarine post higher rates of capital expenditures (capex) in both conventional offshore energy and renewables.
“In our view, the offshore construction cycle for both conventional oil and gas and renewables has room for growth in the next few years, especially given the lack of spending by the global oil and gas industry, thus constraining energy supply,” Loh writes.
“In addition, the war in Ukraine appears to have led to a re-focus by majors such as BP, Eni, Equinor, Shell, ExxonMobil and Equinor towards further investment in offshore Africa. On the offshore wind sector, Europe continues to add capacity and is projected by Rystad to add 4.2GW in capacity in 2022 and then almost doubling again in 2023 to 7.3GW,” he adds.
While Loh has kept his earnings estimates on SembMarine unchanged so far, he sees new orders for rigs as a catalyst to the counter’s share price.
Works for offshore renewable installations or fabrication works as well as repairs and upgrades work for cruise ships and other commercial vessels are also potential catalysts to SembMarine’s share price.
Shares in SembMarine closed 0.5 cent lower or 4.5% down at 10.6 cents on June 22.