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Broker's take: UOB Kay Hian maintains 'hold' on SembMarine

UOB Kay Hian maintained a hold call on Sembcorp Marine on Thursday morning, stating that the recent termination of the Oro Negro rig-building contracts should have no impact on SembMarine's bottom line in the coming quarters.

SembMarine on Tuesday disclosed the termination of contracts with Oro Negro for the construction of three jack-up rigs. IHS Markit estimated that these rigs will cost US$623 million to build.

UOB Kay Hian noted that SembMarine has reversed out the profits recognised in Q3 FY15 and halted any further revenue recognition.

The brokerage said that SembMarine may have further written down the rig value when it provided another US$280 million for its problematic rig contracts in Q4 FY15.

It added that SembMarine could resell its rigs without taking further losses.

This takes into account two considerations. First, recent resale of newbuild rigs by yards were transacted at discounts to the original contract prices of 20-45 per cent.

Second, each Oro Negro rig carries an estimated uncovered cash cost of US$136 million, reflecting a 35 per cent discount from its original contract value of US$209 million per rig.

UOB Kay Hian maintained a target price of S$1.77 for SembMarine.

SembMarine last traded at S$1.735, down one cent as at 9.44am.

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