• To sell West Rigel rig
• Price correction post KEP fine
• Upgrade to HOLD

Share price divergence between KEP and SMM

Following Keppel Corp’s (KEP) announcement last Saturday that its O&M unit will pay fines totalling US$422m (S$570m), Sembcorp Marine’s share price corrected 5% from S$1.94 on 22 Dec to S$1.85 on 29 Dec before benefitting from strong oil prices on 2 Jan to close at S$1.87. Keppel Corp’s share price fell from S$7.34 on 22 Dec to S$7.29 on 26 Dec but recovered subsequently to close even higher at S$7.53 yesterday. The divergence in share price performance is likely due to SMM’s O&M pure play status and relatively smaller asset base compared to KEP. The market may be wondering if SMM will face a similar penalty, and if so, the fine will comprise a larger percentage of SMM’s net asset value.

To Sell West Rigel for US$500m

SMM also announced on 26 Dec that it has inked an agreement to sell the semi-submersible rig West Rigel to a buyer at a price of US$500m. Compared to the US$568m price tag that was agreed on with the original owner, Seadrill’s North Atlantic Drilling, this is only 12% lower, illustrating the relative resilience in prices for quality assets built by yards like SMM. Meanwhile, a ~S$24m loss will be booked by SMM if the above sale materializes.

Upgrade to HOLD

For Keppel, the financial penalty is an extraordinary item and its impact is one-off. We estimate that the fine of S$570m accounts for about 4.5% of KEP’s 3Q17 net asset value. We are in no position to comment on whether SMM will be impacted, but based on a back-of-theenvelope calculation, S$570m would represent about 22.6% of SMM’s 3Q17 net asset value. Similar to KEP, should there be any fine, we do not expect any operational impact.

Meanwhile, oil prices have remained at relatively healthy levels, and posted their strongest opening to a year since 2014 yesterday; consensus for Brent (according to Bloomberg) is looking at US$65/bbl for 2018.

We tweak our P/B multiple slightly from 1.8x to 1.85x and our fair value estimate rises from S$1.74 to S$1.78. With the less than 5% downside to our FV, we upgrade our rating on SMM to HOLD.

Source: OCBC Research - 3 Jan 2018