Brokers’ take: CGS-CIMB upgrades Sembmarine to ‘add’ on greater deal certainty 

Michelle Zhu
Published Fri, Oct 28, 2022 · 11:27 AM

WITH Sembcorp Marine (Sembmarine) one step closer to becoming the largest regional yard upon its anticipated merger with Keppel Corporation’s offshore and marine (O&M) unit, CGS-CIMB has upgraded its call on the stock to “add” with a higher price target of S$0.19 compared to S$0.11 previously.

Sembmarine : S51 0%’s upgrade is premised on greater deal certainty to acquire Keppel O&M, as well as the enlarged entity’s stronger order book of over S$18 billion.

Its higher target price is based on a 1.6 times price-to-book value (P/BV) multiple or the average trading band since the 2015’s oil price crash. It also represents a 50 per cent discount to the average peak cycle where the stock traded at two to four times P/BV in 2013 to 2016. 

In a report issued Friday (Oct 28), CGS-CIMB analysts said that the revised merger terms “work in slight favour” of Sembmarine as they “reflect possible previous pushback from Sembmarine’s minority interests”.

They estimate that the deal would improve Sembmarine’s pro-forma net tangible assets (NTA) per share by about 5 per cent to S$0.068 from S$0.065, based on the enlarged entity’s FY2021 NTA of S$4.6 billion.

The enlarged entity’s combined order book of about S$18.6 billion is a key driver for leading Sembmarine to profitability potentially by FY2024, added the analysts. 

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Based on pro-forma projections post the merger, CGS-CIMB foresees the combined entity’s order book gradually reaching S$5 billion to S$6 billion and a conservative net margin of 3 to 5 per cent, to yield a profit ranging from S$160 million to S$280 million per annum.

“With the change in structure, we think the management control/strategy should remain with Sembmarine. Integration risks could be minimal as both Sembmarine and Keppel O&M now service a common single largest customer – Petrobras,” said the analysts, who are also expecting margin expansion due to cost optimisation resulting from the merger.

Commenting on the revised merger terms, UOB Kay Hian (UOBKH) analyst Adrian Loh highlighted that Sembmarine shareholders will benefit from less dilution due to the lower consideration price for Keppel O&M.

In his view, the transaction has “dramatically improved in quality” since it was first announced in April this year as the combined entity’s net order book has risen by nearly three times to exceed S$18 billion, from S$6.4 billion as at end-2021.

UOBKH has a “buy” rating on the stock with a price target of S$0.156. In a Friday note the brokerage said it believes Sembmarine is well-placed to return to profitability in 2023.

While OCBC Investment Research (OIR) acknowledges that the revised merger terms may reduce the transaction’s completion by up to two months and represents a significant milestone for Sembmarine, the research house maintains its “hold” recommendation on the stock with a fair value estimate of S$0.12.

OIR in a Friday note highlighted Sembmarine’s efforts in rebuilding its order book by winning oil and gas-related contracts such as its latest US$3.1 billion FPSO (floating, production, storage and offloading) contract from Petrobras.

As at 10.55am on Friday, the counter was trading S$0.003 or 2.5 per cent higher at S$0.12. 

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