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Simons Trading Research

Author: simonsg   |   Latest post: Mon, 6 Jun 2022, 4:02 PM

 

Sembcorp Marine - Things Can Only Get Better; Upgrade to BUY

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  • We upgrade Sembcorp Marine to a BUY as we believe much of the negatives surrounding the company are priced in at current levels. Post its S$1.5b rights issue, Sembcorp Marine should be in better shape to weather market conditions over the next 12-18 months and hopefully enable it to garner new orderflow.
  • Our new P/B-based target price for Sembcorp Marine uses a 0.74x target multiple for 2022 which is a 30% discount to the company’s past-five-year average P/B of 1.07x.

Upgrading to BUY as We Believe Much of the Negatives Are Priced in

  • We have upgraded Sembcorp Marine (SGX:S51) to a BUY with a target price of S$0.11/share which represents ~28% upside from current levels. We have assumed that the company’s rights issue successfully raises S$1.5b, which results in a 2022 estimated book value per share of S$0.14. We have pegged our target multiple of 0.74x to this book value which results in a target price of S$0.11.
  • At Sembcorp Marine’s EGM on 23 August, 52.4% of the company total outstanding shares were voted, and of this, 98.1% were in favour of the rights issue. Note that all parties were allowed to vote on the resolution, even Sembcorp Marine’s 43% shareholder Temasek Holdings.
  • Going into the EGM, Temasek had pledged to subscribe for both its pro-rata entitlement as well as excess rights and thus take up as much as 67% (or almost S$1b) of the rights issue. DBS (SGX:D05) had undertaken to underwrite the remaining 33%. While a mandatory general offer (MGO) will be triggered, Sembcorp Marine had previously stated during its 1H21 results briefing that its major shareholder had committed to keep Sembcorp Marine as a listed company. We highlight that Temasek has not sought a waiver to conduct an MGO.

Where Could We be Wrong for Sembcorp Marine?

  • The downside case for Sembcorp Marine includes:
    • a more prolonged supply of labour for Sembcorp Marine’s shipyards.

Buy the Rights Issued by Sembcorp Marine, If You Have Patience

  • With the Sembcorp Marine rights price closing at S$0.002 on the offshore renewables and marine industry.

Positive News From Sembcorp Marine’s Largest Debtor

  • There has been good news from one of Sembcorp Marine’s largest debtors, Borr Drilling (BORR US), which lately has secured some medium-term work for its jackup rigs. These are detailed in the PDF report attached below.
  • Mist, in particular, is warm-stacked rigs during 2H21.

Sembcorp Marine - Earnings Revision

  • We have left our earnings estimate for 2021 to green energy solutions.

Sembcorp Marine - Valuation & Recommendation

  • Upgrade Sembcorp Marine to BUY with a scenario. To quantify the potential downside, we note that Sembcorp Marine’s trough than -1 standard deviation below its five-year average.

Sembcorp Marine's Share Price Catalysts

  • Successfully raising S$1.5b via its rights issue, which the company is targeting to complete in 3Q21.
  • New orders for rigs, offshore renewable installations or fabrication works.
  • Merger or JVs with other shipyards.

Source: UOB Kay Hian Research - 6 Sep 2021

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Chart Stock Name Last Change Volume 
Sembcorp Marine 0.108 +0.003 (2.86%) 57,817,700 

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