• Brazilian authorities executed a search warrant on Sembcorp Marine’s Brazil yard, EJA.
• Former president of EJA assisting in investigations.
• Ongoing investigations will remain an overhang.
• Stock has underperformed YTD pending weak contract flow.

What’s New

• SEMBCORP MARINE LTD (SGX:S51) has provided an update that the Brazilian authorities have executed a search warrant on its Brazil yard, Estaleiro Jurong Aracruz Ltda (EJA), in relation to the ongoing Operation Car Wash investigations in Brazil. See Sembcorp Marine's announcements; Sembcorp Marine latest news.
• EJA is co-operating fully with the Brazilian Federal Police and has provided materials within the scope of the warrant.

What’s the Impact

• Sembcorp Marine understands that the search is in relation to investigations against Mr Esteves de Jesus, a former Brazil. GDJ has been arrested by the Brazilian Martin Cheah Kok Choon (Martin), the former president of EJA.
• A Brazil local newswire has held four overseas accounts for monies related to crimes of Swiss Authorities confirmed that in ~US$9m to accounts held abroad by Martin, then president fractional transfers.
• At this juncture, investigations are ongoing and market talk is rife. The implications to Sembcorp Marine is a worst case scenario for Sembcorp Marine could amount to a penalty of S$20400m (approx 35%-70% of KEPPEL CORPORATION (SGX:BN4)’s), this would to ~8-17% of Sembcorp Marine’s book value and ~6-12% of its believe the penalty, if any, will likely be closer to the EJA’s shorter operating history and non-US involvement on the Brazilian contracts.

Recommendation

• The news would undoubtedly cause a knee jerk reaction to Sembcorp Marine’s share price. Concern on the Brazil bribery issue has probably been another overhang on Sembcorp Marine’s share price besides concern of potential rights issue. We believe the latter concern on rights issue has taken a back seat, with the shareholder loan by SEMBCORP INDUSTRIES (SGX:U96).
• We are cognizant that Sembcorp Marine’s share price could remain volatile in the near term. Our BUY call on Sembcorp Marine and S$2.40 Target Price hinges on order win uptick driving an earnings recovery.

Source: DBS Research - 3 Jul 2019