Sembmarine: Out with the old, in with the new

AFTER more than seven hard years of an oil and gas slump that was punctuated by a pandemic-fuelled historic oil crash to boot, this could be the year the stars start to align for Singapore’s offshore & marine (O&M) heavyweight Sembcorp Marine (Sembmarine).

If anything, the loss-making company’s latest FY2022 should imbue hope. For the year ended December 2022, the group’s losses narrowed significantly to S$261 million versus the previous year’s loss of S$1.2 billion. In the second-half period, Sembmarine turned Ebitda (earnings before interest, taxes, depreciation, and amortisation) positive while the key financial metric remained negative for the full year, albeit 99 per cent improved from FY21.

Sembmarine attributed the better showing to strong execution and delivery of 22 and 12 projects, respectively, over the course of the year ended December last year.

With that, the offshore engineering stalwart, which counts Temasek as its single largest shareholder, has clearly put 2021 behind it – the firm’s most brutal year on record as it was beaten down by spiralling costs, a manpower crunch and supply chain woes, which led to hefty provisions and impairment losses. It was also the year that spawned the start of the decades-long speculated union of Sembmarine and the O&M arm of Keppel Corp .

Sembmarine’s latest earnings score card will soon, however, be old news, set to be overshadowed by the completion of Singapore’s landmark O&M merger on Tuesday (Feb 28).

Trading in the counter was halted on Tuesday. When trading resumes, the enlarged Sembmarine – armed with a sizeable order book of S$18 billion and greater focus on offshore renewables, new energy and sustainable solutions – will emerge. Based on its last traded price on Monday, the market capitalisation of the “new” Sembmarine will rise to S$8.67 billion from S$3.99 billion.

A day after the transaction is done and dusted, the distribution in-specie of 49 per cent of new Sembmarine shares will be credited to Keppel shareholders. (Under the deal’s key element, Keppel will receive 36.85 billion new shares of the combined entity and will distribute in-specie 49 per cent of the enlarged Sembmarine shares or 19.1 Sembmarine shares per Keppel share held to eligible shareholders).

Temasek aside, it remains uncertain what percentage of Keppel’s existing shareholders would choose to keep or ditch Sembmarine; this overhang could likely see the counter, which has seen an uptick in interest among short sellers, come under selling pressure.

There also appears to be much ado over Sembmarine’s inclusion in widely-tracked indices. Thursday (Mar 2) marks the first day of Sembmarine’s inclusion into the MSCI Singapore Free Index (SiMSCI index) Standard. This marks a sort of “upgrade” for Sembmarine from being a constituent of the MSCI Singapore Small Cap index.

There is also the possibility of the bigger Sembmarine being included in a bunch of other widely-tracked global indices. Sembmarine is currently not part of the FTSE Straits Times Index. While the cut-off date for the March review is over, some analysts reckon the possibility of it being included in the index may not be completely off the table. Whichever way these unfold, the share price could swing.

For these reasons, do not rule out heightened volatility in the counter in the near term. This may, in turn, dull the shine off the birth of Singapore’s homegrown offshore behemoth in a sector that is bursting with competition and where size reigns.

But if Sembmarine is able to overcome the massive integration challenges that await and steps up the order book momentum with its newly-created girth in terms of geographical footprint, operational scale and capabilities, the medium to longer term is set to look way brighter.