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SembMarine hit by renewed fears over scandal fallout
SINGAPORE'S rig builder Sembcorp Marine has yet to put the fallout from Brazil's mammoth corruption scandal behind it as renewed fears over potential fines sent the stock skidding after the company revealed that its yard in the southeastern state of Brazil was raided and the facility's former president was being investigated.
The latest news compounded worries for the highly-geared offshore and marine company that was already dealing with an industry downturn, one that is taking longer than expected to pick up. There was a piece of positive news, though, over a week ago when parent Sembcorp Industries said it was extending a S$2 billion loan to SembMarine to give it breathing space to ride the slump.
One analyst pointed to other uncertainties such as whether the recent development could lead to a "contingent indictment".
SembMarine's stock tumbled 13 Singapore cents or 8.4 per cent to finish at S$1.41, after falling by nearly 10 per cent in intraday trade on heavy trading volumes of over 30 million shares - over six times its average daily trading volume over one year - worth S$43 million.
The implications to SembMarine is uncertain, according to DBS Group Research analyst Ho Pei Hwa.
"If we were to make a guesstimate, we believe a worst-case scenario could amount to a penalty of S$200 million-S$400 million (approximately 35-70 per cent of Keppel's)," she said, adding that this would translate to around 8-17 per cent of its book value and 6-12 per cent of market cap.
"However, we believe the penalty, if any, will likely be closer to the lower end of the range given EJA's shorter operating history and non-US involvement on the Brazilian contracts," she continued.
EJA refers to SembMarine's Brazil subsidiary Estaleiro Jurong Aracruz Ltda.
In 2017, Keppel Corp's offshore and marine unit agreed to pay US$422 million in fines after it reached a global resolution with criminal authorities in relation to corrupt payments made by a former agent in Brazil following investigations.
Before the market open, SembMarine provided the update that the Brazilian police searched EJA and that it has co-operated fully and provided materials within the scope of the search warrant. The search, in relation to the ongoing probe called Operation Car Wash in Brazil, involved investigations against a former consultant engaged by EJA in Brazil, Guilherme Esteves de Jesus who has been arrested and is currently facing ongoing criminal charges.
The current investigations also involve EJA's former president Martin Cheah Kok Choon, it added.
One market watcher said that while the probe into one of its former consultants was somewhat known in the market buzz, news that the probe's net also involved EJA's ex-president was new.
SembMarine made S$329 million worth of provisions for the Sete Brasil drill ship contracts in fiscal 2015. Sete Brasil, a rig-owning unit of Petrobras, was reported to have awarded contracts to SembMarine and Keppel Offshore & Marine. In the company's 2018 annual report, SembMarine said the provisions remained adequate under the circumstances.
According to news reports, as part of Sete Brasil's judicial recovery plan that was approved by creditors last November, drilling rigs being built by the Singapore-owned yards in Brazil could be potentially put up for sale.
If this happens, analysts say it would be positive for SembMarine as it would mean potential write-backs of provisions.
The latest development underscores the sprawling nature of Brazil's largest corruption probe that is still playing out five years on; it has involved illegal payments and bribes for contracts and brought down hundreds of politicians and executives.
"The allegations first surfaced in 2015, and SembMarine vehemently denied wrongdoing. Pending the outcome of the investigation (potentially a drawn-out process) and given the lack of details, our base case does not factor in the impact from a potential fine," said Citi.
"That said, we note that a S$500 million fine would have a 35 cents a share impact to SMM's NAV (net asset value)," it added.
The issue has no doubt been an overhang for the company.
"We had consistently highlighted the risks relating to Brazil as investigations are still ongoing with no clear conclusion reached. Without clarity on Brazil, this has been one of the reasons why we have been reluctant to recommend a 'buy' on the stock", said OCBC Investment Research in a note on Wednesday.
In a report dated one day prior to the raid, CGS-CIMB analyst Lim Siew Khee had cut the stock's target price to S$1.54 from S$1.75 but nevertheless stuck to her "add" rating after trimming the company's contract win expectations for 2019 and 2020 and earnings estimates for the next three years.