• Share price down 40% from peak
• New work coming up but to take time
• Take a longer term view

Looking Back at the Roller-coaster Ride

After appreciating close to 50% to its peak of S$2.81 in early Feb this year, the share price of Sembcorp Marine (SMM) has dropped by about 40% to the current price of S$1.67. Currently, the stock is trading at about 1.45x forward P/B, compared to its trough of 0.9x in early 2016 and peak of 3.2x in 4Q13 over the past five years.

As mentioned in our earlier reports, we have been hesitant to use relatively high historical P/B pegs given current and forecasted low ROEs.

New Work Coming Up; But Patience Needed

Though new contracts secured in 1H18 totalled S$730m, we keep our new order target of S$3b for this year and next unchanged for now, given the lumpiness and significant size of potential new orders. Indeed, some potential work that have been flagged include

1. Gravifloat LNG export terminal for Poly-GCL at ~S$1b,
2. two large CGL carriers for Seaone, and
3. Chevron’s Rosebank FPSO off the UK.

The group’s transformation efforts to move up the value chain has resulted in new business opportunities but they require significant time and effort in project co-development with potential customers before orders are secured.

Such new-build EPC projects have detailed engineering and construction planning phase, which may take as long as six to 12 months before main construction activities and corresponding revenue recognition can take place. This is unlike building several rigs one after another based on the same design.

Investors to Take Longer Term View; Waiting for Clarity on Brazil

Despite the low forecasted ROEs for now, we believe that SMM’s established track record in the offshore marine space, innovative and proprietary technology, as well as its new mega yard put it in good stead to secure a wider range of work than before.

Investors have to take a longer term view of the stock, while staying vigilant of any news from the Brazil front. Based on 1.75x FY19F adjusted book (conservatively trim for Brazil risk), we derive a fair value estimate of S$1.74 for SMM.

Source: OCBC Research - 20 Aug 2018