Sembmarine faces a tough week ahead

SEMBCORP Marine (Sembmarine) will be closely watched this week by analysts and investors as Temasek Holdings' mandatory conditional general offer at S$0.08 per share closes on Wednesday (Nov 3) at 5.30 pm.

While confidence in the beleaguered offshore and marine (O&M) company is very weak, its shares appear to be trading well below their intrinsic value.

Provenance Capital - Sembmarine's independent financial adviser (IFA) - estimates the company's net asset value (NAV) as at Jun 30 adjusted for its recent rights issue stood at S$0.1437 per share.

Sembmarine has warned it could report a loss for H2 2021 close to the loss of S$647 million it reported for H1 2021. Taking this into account, the IFA estimates Sembmarine's NAV as at Dec 31 will be approximately S$0.1246 per share.

The IFA also noted in its Oct 20 letter to Sembmarine's independent directors that valuing certain group assets (mainly the yards) on a discounted cash flow basis would put Sembmarine's revalued NAV at between S$0.1697 and S$0.2043 per share.

Provenance Capital further pointed out that seven "comparable companies" it identified - Keppel Corp, Korea Shipbuilding & Offshore Engineering, Aker ASA, CSSC Offshore and Marine Engineering, Samsung Heavy Industries, Daewoo Shipbuilding and Marine Engineering and Saipem - were trading at between 0.7 times and 2.8 times their NAVs.

The IFA went on to say that its "estimated value range" for Sembmarine for the purposes of the offer is between S$0.125 and S$0.14 per share.

Given that Temasek has only offered to pay S$0.08 per share for Sembmarine, the IFA has declared its offer to be "not fair and not reasonable". Sembmarine's IDs have recommended that investors reject the offer.

Yet, it has been three months since Sembmarine even came close to trading at the bottom end of the IFA's estimated value range. In fact, shares in Sembmarine have been dipping below Temasek's offer price of S$0.08 with increasing persistence in recent weeks.

Sembmarine closed Friday at S$0.079.

What is weighing the stock down? Is this an opportunity to buy Sembmarine at a bargain price? Or, will things get worse before they get better?

Pandemic problems

It is worth noting that Temasek's offer is conditional upon it receiving sufficient acceptances to push its stake in Sembmarine to more than 50 per cent.

If Temasek's stake in Sembmarine does not cross the 50 per cent threshold by the close of the offer, investors who had accepted the offer might then choose to sell their Sembmarine shares in the market.

Temasek held a 46.6 per cent stake in Sembmarine just prior to the offer.

In the meantime, unfolding events have continued to underscore the basic problem that has dogged Sembmarine - that is, pandemic-related supply chain disruptions and labour issues causing project delays and cost overruns.

On Oct 15, Sembmarine apologised to its workers housed at the Westlite Jalan Tukang Dormitory. Residents at the dormitory had vented their frustration earlier in the week about delays in medical support and poor living conditions, in an incident that drew armoured riot police to the vicinity.

Then, on Oct 24, Sembmarine sought to clarify news reports that its customer Equinor plans to transport the unfinished hull and turret for the Johan Castberg floating production, storage and offloading (FPSO) vessel from Singapore to Norway to avoid further pandemic-related delays.

Sembmarine had announced in late 2017 a US$490 million contract from Equinor (then known as Statoil Petroleum) to build the hull and living quarters of the Johan Castberg FPSO. The project was originally scheduled for completion in Q1 2020.

But the Petroleum Safety Authority Norway (PSA) became aware of quality defects in welds on the hull for the FPSO.

An investigation by PSA ensued in late 2020 and found, among other things, that welding expertise and quality control at Sembmarine were inadequate; and that Equinor failed to "get to grips" with these problems early enough.

In its statement on Oct 24, Sembmarine said there had been variations and additions to the scope of work for the FPSO that required additional time to execute. Nevertheless, the hull and living quarters are now largely completed.

Sembmarine went on to say that Equinor has requested that it plan the remaining scope of work to accommodate the available transportation window for the towing operations to Norway.

"Such adjustments are provided for in the terms of the contract and the company and Equinor are presently finalising these arrangements," Sembmarine added.

Weak sentiment

There is something to be said for Sembmarine getting delayed projects like the Johan Castberg FPSO out of the way, as it could free up capacity for potentially more profitable work.

Yet, investors do not seem to be in the mood to look for silver linings in the dark clouds hanging over Sembmarine.

Who can blame them? Sembmarine has tapped its shareholders twice since last year with deeply discounted rights issues, expanding its outstanding number of shares from less than 2.1 billion to nearly 31.4 billion, without clearly stating how it plans to staunch its losses in the event the pandemic does not subside.

Moreover, the O&M arm of Keppel Corp appears to be coping better with the pandemic than Sembmarine. Keppel said in a business update last week that Keppel O&M was profitable for the first nine months of 2021, reversing the net loss it sustained for the same period last year.

Keppel O&M also managed to deliver five major projects in Q3 2021 on time, despite facing pandemic-related supply chain and manpower challenges.

For shareholders of Sembmarine, this raises uncomfortable questions about the business strategies and priorities of their company's board and management.

It could also stoke concerns about whether Sembmarine will be fairly valued in a merger with Keppel O&M.

During a conference call last week, officials at Keppel said a "definitive agreement" on the merger could be hammered out as early as the end of this year - that is, before any likely turnaround in Sembmarine's profitability.

Of course, the operating backdrop for the O&M sector is dynamic and investor sentiment is notoriously fickle.

It could just be a matter of time before measures to contain Covid-19 are rolled back significantly, putting an end to the supply chain and manpower problems that have weighed on Sembmarine and turning attention to the deep discount at which its stock is trading to its book value.

Barring the emergence of such catalysts for the stock, however, it seems likely that Sembmarine will slip lower when Temasek's mandatory conditional general offer closes this week.