• Sembcorp Marine's share price has seen stellar performance this year, rising 42% year-to-date. We believe that there remain catalysts for the stock to continue its re-rating, with disclosure of merger terms with Keppel Offshore Marine and new order wins being the main near-term ones.
• In our view, Sembcorp Marine (SGX:S51) is a turnaround story with its recent large order win possibly presaging more positives on the new order win front, especially in the renewables sector.

Near-and Medium-term Catalysts to Sembcorp Marine's Share Price

• Despite 42% increase in Sembcorp Marine's share price year-to-date that easily outperforms the STI’s rise of 8%, we believe that the stock continues to present near-to medium-term upside. In our view, this would be driven primarily by:
  1. the disclosure of the merger terms with Keppel Offshore Marine by 30 Apr 22, and
  2. new order wins for oil & gas production assets and/or renewable industry assets.
• From a top-down perspective, a merger will create a more competitive and larger scale offshore construction company that could be on the cusp of a turnaround in profitabilty.

Quantifying the Upside

• Our estimates continue to project a slight loss for Sembcorp Marine in 2022, and while Bloomberg consensus currently forecasts much larger losses for the company, we highlight that some of these loss forecasts for 2022 and 2023 have been scaled back in the past two months. However, should the company win more orders, the earnings turnaround story for 2023 could become more compelling over the next six months.
• In the meantime, we note that Sembcorp Marine’s past 5-year average P/B (excluding peak in 2019) of 1.1x implies a valuation of S$0.143/share, while its past 10-year average of 1.5x would translate to a valuation of S$0.189/share.

Recent Announcement of Sembcorp Marine’s First New Order Win Is a Step in the Right Direction

• On 23 Mar 22, Sembcorp Marine announced that it had won a construction contract for a Wind Turbine Installation Vessel (WTIV) from Maersk Supply Services which we conservatively estimate is worth around S$650m. Construction will start in 4Q22 with delivery of the vessel slated for 2025 with payments dependent on milestones.
• Note that this is Sembcorp Marine’s first contract win since its announcement of modification work for a Floating Production Storage and Offloading vessel in Brazil in Jun 21.

Wind Turbines Will Get Forecast in the Chart on the RHS

Spending on Fossil Fuels Will Increase in 2022

• Spending on fossil fuels will increase in 2022 with recent industry estimates forecasting a 16% y-o-y increase in capital and operational expenditure to US$1.1t for the upstream oil & gas sector. However, this is still short of the previous peak of nearly US$1.4t in 2014. Part of this increase stems from increased project costs which, compared to 2020 levels, have risen by 10-20%, due largely to steel prices and a tight market for equipment and labour according to Rystad.
• Nevertheless, with higher observed utilisation and day rates for offshore assets globally, we believe this should benefit Sembcorp Marine in the medium term, especially for production assets.

Maintain BUY With Increased Target Price

• No changes to risk has dissipated.

Is Sembcorp Marine a Beneficiary of Recent Oil Price Strength?

• In our view, Sembcorp Marine is a second derivative beneficiary of stronger oil prices as it needs upstream oil & gas companies to respond to the higher oil prices by placing orders for either exploration or production assets (preferably both).
• Given that the forward going forwards, we should expect less correlation between oil price and Sembcorp Marine's share price as the company becomes increasingly geared towards the renewables segment.
• Catalysts: New orders for rigs, offshore renewable installations or fabrication works as well as repairs and upgrade work for cruise ships and other commercial vessels.

Source: UOB Kay Hian Research - 14 Apr 2022