Brokers' take: UOBKH upgrades Sembmarine to 'buy' on rights issue hopes

UOB KAY HIAN (UOBKH) has upgraded Sembcorp Marine (Sembmarine) S51 to "buy" as it believes the group's S$1.5 billion rights issue should enable it to better weather market conditions over the next 12-18 months, and hopefully garner new order flow.

The move comes despite a lower price target of 11 Singapore cents per share compared to 12.4 cents previously, after factoring in a 0.74 times target multiple for FY2022 and assuming a successful rights issue of S$1.5 billion.

In a report on Monday, analyst Adrian Loh said he believes much of the negatives surrounding Sembmarine have been priced in at current levels.

He thinks the new price target's 30 per cent discount to Sembmarine's past-five-year average price-to-book value of 1.07 times is a "reasonable reflection" of the industry risks faced by the company in the next 12 months at the least.

Existing shareholders of the stock should subscribe to the rights issue at the rights' last closing price of 0.2 cents last Friday, in his view. A successful rights issue, which Sembmarine targets to complete by Q3 of 2021, is estimated to result in a 2022 book value per share of S$0.14.

"However, we caution that investors (buying into the rights issue) may have to exercise a considerable amount of patience given the uncertainty around the timing of an upturn in the offshore renewables and marine industry," said the analyst.

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While UOBKH has left its earnings estimates for FY2021 unchanged, the research house has lowered its earnings forecasts for FY2022. Its loss expectations for the year now stands at S$133 million versus S$66 million previously, as it is anticipating the industry upturn to take longer than expected.

The brokerage is also positive on recent news of Borr Drilling, Sembmarine's largest debtor, securing some medium-term work for its jack-up rigs.

"Mist, in particular, is an important rig to note given that it was supposed to have been warm stacked but instead recently won a short-term contract in Southeast Asia," noted Mr Loh.

"Importantly, Borr's 2Q FY2021 results appeared decent with a 13 per cent quarter-on-quarter increase in operating revenue to US$55 million, while adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) was US$3.7 million versus an Ebitda loss in Q1 FY021."

Shares of Sembmarine were trading flat at 8.6 cents as at 11am on Monday.

READ MORE: 

• Sembmarine shareholders seek answers from management on rights issue, outlook

• Sias questions Sembmarine's latest proposed S$1.5 billion rights issue

• Is Sembmarine's rights issue to position it for a cash-depleting merger with Keppel O&M?

• SembMarine and Keppel's O&M union: when one is better than two