Brokers’ take: DBS reinstates coverage on Sembmarine, predicts a profitable FY2024
Bryan Kow
DBS Group Research has reinstated coverage on Sembcorp Marine (Sembmarine) with a “buy” call and a target price of S$0.14.
The last rating DBS issued for Sembmarine was “hold” with a target price of S$0.09 on Mar 23, 2022.
The new target price is based on a 1.2 times price-to-book ratio which is in line with the median valuation of the stock’s peers.
In a report on Tuesday (Mar 28), analyst Ho Pei Hwa said Sembmarine is currently trading at an undemanding valuation, specifically a 20 per cent discount to its regional peers’ median of 1.2 times.
In her view, much of the re-rating upside could come from a higher valuation multiple due to “robust momentum in order wins”, along with an expected earnings turnaround in the near term.
She projects the combined entity to turn profitable in FY2024, given the marine and offshore engineering company’s stronger order book following its acquisition of Keppel Offshore & Marine (KOM) on Feb 28.
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Despite Sembmarine’s share price tumbling from a five-year high of S$1.05 in 2018, Ho said she is now hopeful about operational improvement post merger, which has resulted in a stronger balance sheet and combined order book of over S$17 billion.
She believes this will allow the group to narrow its losses in FY2023 while also providing greater revenue visibility over the next two to three years.
“Armed with (a) strengthened balance sheet, we expect revenue and cost synergies post integration to drive earnings turnaround by FY2024,” said the analyst.
DBS expects the group to book FY2024 revenue of S$6.7 billion, resulting in net profit of S$214 million and earnings per share of S$0.0031.
Ho however cautioned that unexpected oil price plunges could dampen the momentum of order wins, while Sembmarine’s earnings recovery could also be delayed by integration hiccups and expenses.
The issue of investigations by Brazilian authorities into Sembmarine’s local unit, Estaleiro Jurong Aracruz, for alleged irregularities also poses another risk to the counter.
“Such proceedings are usually long drawn out, and this could remain an overhang for at least a few months, till conclusion,” said Ho.
Nonetheless, she expects Sembmarine’s share price to “bounce off its low” as other positive developments such as the group’s expected earnings recovery and new order wins outweigh the investor sentiment that had led to the recent share price correction.
The counter closed 4.8 per cent or S$0.005 higher at S$0.11 on Tuesday.
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