• Offer in the works?
• Trading at 1.9x P/B
• 20% premium translates to S$2.76

Two Price Spikes Last Week

Sembcorp Marine’s share price spiked 9.4% on Tue last week and another 9.5% on Fri. There can be several reasons behind this, such as 1) a potential privatisation or divestment by SCI, 2) no fine or small fine with regards to Brazil as opposed to Keppel Corp, or 3) a big order is coming up. However, judging from the recent price action, the possibility of scenario 1 or 2 seems more likely.

Past Transactions in 2016 and 2017

Last year, COSCO Shipping International Singapore (formerly known as COSCO Corp Singapore) disposed of its shipyard assets in China to its parent at a P/RNAV basis of 0.92x, which was higher than the 0.7x implied P/NAV for Vard Holdings in 2016 during the voluntary general offer.

SMM also disposed of its interest in COSCO Shipyard in 2016 at an implied P/NAV of 1.22x. However, we do not believe SMM deserves similar low valuations given its established track record in a wider range of premium products, higher ROEs and the potential to secure new orders in promising segments such as FLNG.

20% Premium From Current Levels is About S$2.76/share

Currently, SMM is trading at 1.9x P/B, which is higher than the +1 s.d. level based on a three year historical average. In mid-2015, SMM also traded at 1.9x book and Brent then was around US$66/bbl which is similar to the current price. We have been valuing SMM at 1.85x book but had earlier trimmed the book to be conservative post Keppel Corp’s S$590m fine. We adjust our estimated book value and increase our P/B to 2.0x, arriving at a fair value estimate of S$2.37.

Should an offer for SMM materialize, there could still be some upside supposing the price offered is higher, which is typically the case to entice shareholders to bite. Assuming a 20% premium from current levels, this would translate to about S$2.76/share.

We maintain our HOLD rating based on our fair estimate of S$2.37, but do not exclude the possibility of further price appreciation in the event of a corporate action.

Source: OCBC Research - 22 Jan 2018