New Order Win Continues Its Positive Momentum
While SMM’s new order win worth S$200m from the Brazilian Navy was largely
expected, this nevertheless underscores the company’s continuing positive momentum
and we expect more conventional and renewables orders in the near to medium term.
SMM’s robust rate of deliveries in 1Q22 has led to material balance sheet improvement
with its net debt/equity declining to 0.38x at end-1Q22 from 0.49x at end-4Q21. Maintain
BUY. Target price: S$0.156.
WHAT’S NEW
• New order win as expected. Sembcorp Marine (SMM) recently won a S$200m
engineering, procurement and construction (EPC) contract from the Brazilian Navy for a
newbuild ice-capable support vessel for deployment in the Antarctic. The project will be
executed at SMM’s Estaleiro Jurong Aracruz yard in Brazil to comply with local-content
requirements, however some other work such as specialised shipbuilding design will be
carried out in Singapore. The company disclosed that construction of the vessel will
commence in 2022 with completion in 3Q25. SMM had earlier indicated that it was
reasonably confident about this order win at its 1Q22 business update in mid-May 22, and
this success reaffirms our view that the company will continue to garner further order wins as
the year progresses.
• Executing well on its current orderbook. Out of the 17 projects that it is currently working
on, SMM is slated to deliver 12 of these in 2022; however, with six of these already delivered
to its clients (see table below), we should expect better operating cash flow and a
meaningful narrowing of losses vs 1H21. Indeed in its announcement, the company guided
for 1H22 results to be “significantly better” yoy. SMM highlighted that as at end-1Q22, its net
debt/equity had improved to 0.38x compared with 0.49x in end-21.
• Orderbook update. At its 1Q22 business update, SMM disclosed that it had won various
repairs and upgrades contracts, including three vessels for the US Navy as well as nine
containerships from Maersk. As at end-1Q22, SMM had a net orderbook of S$1.75b (which
includes repairs and upgrades contracts) consisting of S$1.51b of projects under execution
and S$0.24b of ongoing repairs and upgrades projects. Including the Brazilian Navy order
win, this would result in a net orderbook of S$1.95b.
STOCK IMPACT
• Looking forward to a larger and more competitive entity. In our view, the upcoming
merger with Keppel Offshore Marine (KOM), 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. In addition, the merged company should have much stronger financials and
human resources to undertake the necessary R&D to compete effectively on the global
stage. According to SMM, the pro forma position as at 31 Dec 21 would see the combined
entity have >50 projects worth about S$6.4b, 2021 revenue of S$3.9b, not to mention a
strong balance sheet. 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.
• What if the merger with KOM falls through? We highlight that the proposed merger in its
current form is locked in, for example the 44:56 equity value exchange ratio and the use of a
discounted cashflow methodology in determining the enterprise value ratio. Should the
merger fail to win shareholder approval, SMM and KOM could resume talks to alter some or
all of the terms; however, we estimate that this would take at least another 6-12 months to
complete.
EARNINGS REVISION/RISK
• None.
VALUATION/RECOMMENDATION
• Maintain BUY with S$0.156 target price. With the SMM/Keppel merger terms largely in
place and the uncertainty out of the way, the focus on SMM will be to garner new orders in
2022 and add to its orderbook. Our target book-value multiple for SMM of 1.2x reflects our
confidence that it will garner such order thus leading to positive share price performance.
• We expect higher rates of capex spending 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. 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 (see chart on RHS).
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.