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Hot stock: SembMarine down 7.8% by midday after Brazil police executes search warrant on unit

NEWS that Brazilian authorities executed a search warrant for Sembcorp Marine's (SembMarine) Brazilian subsidiary Brazilon Estaleiro Jurong Aracruz (EJA) were followed by a selloff in the offshore and marine (O&M) firm during Wednesday's early session.

At the midday break, SembMarine shares were down S$0.12 or 7.8 per cent at S$1.42. It closed at S$1.54 on Tuesday. The 16.8 million shares traded is four times more than the average traded volume in the one-month period up to Tuesday. The value of the trades amounted to S$24.1 million.

The search warrant by the Brazil Federal Police was in connection with ongoing investigations related to Operation Car Wash in Brazil, the country’s biggest anti-graft crackdown.

SembMarine understands the search relates to investigations against Guilherme Esteves de Jesus, a former consultant engaged by EJA in Brazil who has been arrested by the Brazilian Federal Police. He is facing ongoing criminal charges which have not been concluded.

The company said it has a strict compliance programme and continuously works to ensure its policies and procedures are in place to prevent any violation of anti-corruption laws applicable to its operations.

Traders were unsurprised by the search warrant, with one saying "it was only a matter of time that this would happen".

That being said, the trader added: "If the investigations do not hurt SembMarine greatly, the company will come back stronger. But in order for that to happen, SembMarine needs to win more contracts, if not demand for its shares will remain weak. Funds need reasons to buy into the company."

OCBC Investment Research said in a research note on Wednesday: "Without clarity on Brazil, this has been one of the reasons why we have been reluctant to recommend a 'buy' on the stock, though there have been trading opportunities with short time-frames in the past. For most investors, it would be best to wait for clarity on the Brazil issue." 

The research house has maintained its "hold" recommendation on the company, but has lowered its fair value estimate to S$1.50.

Prior to the execution of the search warrant, CGS-CIMB, in a report on Tuesday, maintained its "add" call with a lowered target price of S$1.75 as net gearing for the firm improves in the second quarter to 1.3 times with the completion of semi-submersible crane vessel Sleipnir.

Analyst Lim Siew Khee said the S$2 billion subordinated loan from Sembcorp Industries, backed by Temasek, is "the best outcome" following years of speculation on equity raising, privatisation or bailout options for SembMarine’s highly geared balance sheet. 

The move eliminates risks of dilution and major change in corporate shareholding structure.

"If SembMarine retires about S$1.5 billion of its loans, net gearing could aesthetically be reduced to 0.7 times (including Sleipnir’s collection) by end-2019," Ms Lim added.

A remisier told The Business Times that he exited positions on SembMarine earlier in the week due to headwinds the O&M sector continues to face and will not be monitoring the stock until "it becomes extremely oversold or overbought again". 

At the end of the early session, shares in Sembcorp Industries, which has a 61 per cent stake in SembMarine, were trading at S$2.41, down six Singapore cents or 2.43 per cent.