• Down 40% since downgrade
• Oil price recovering
• Upgrade to HOLD

Share price has corrected by a lot

Since our downgrade to sell in Oct 2015, Sembcorp Marine’s (SMM) share price has corrected by about 40%, compared to the STI’s 3% drop over the same period. At current price level, the stock is trading at about 1.2x book, which is not considered low compared to other oil and gas related counters, but low compared to SMM’s historical stock performance. The lowest point that SMM traded at this year was in early Sep, at S$1.215 and 1.0x book.

Sentiment on oil recovering

For an extended period of time, the stock has been one of the most shorted counters, driving up borrowing costs for short sellers. With news that OPEC (and more recently non-OPEC countries too) are seeking to cut oil production, oil prices have rebounded. We think that sentiment on oil may continue to be supported for now, putting potential short sellers at bay. More importantly, oil prices may have seen their worst as major oil producers have signalled their resolve to support oil prices, and we see less reason to remain as negative on the stock as before.

Upgrade to HOLD; outlook remains challenging

That said, SMM’s outlook remains challenging given the lack of new orders. The group is still executing on its order book (S$8.4b as at end Sep 2016; S$5.2b if exclude Sete Brasil drillships) but little order book replenishment will inevitably drive down earnings. With regards to this, SMM has taken measures to cut costs such as workforce reduction of about 8,000 since 2015 (comprising employees and sub-contractors’ manpower), as well as salary freezes and wage adjustments. Two of the group’s yards will also be returned to the government next year, resulting in cost savings.

Meanwhile, SMM will also dispose of its 30% interest in Cosco Shipyard Group, which will henceforth no longer be a drag on SMM’s results. Taking into account all the points above, we upgrade our rating from sell to HOLD, with a revised fair value estimate of S$1.43 (1.15x FY17F book).

Source: OCBC Research - 14 Dec 2016