More immediately, CGS-CIMB expects SMM to benefit more “given its hunger for establishing a track record in the newbuild floating production storage and offloading (FPSO) arena”.
The most notable FPSO contract at the moment is the US$1.4 billion-1.5 billion ($1.9 billion-$2.0 billion) Rosebank project for Norway’s Equinor which is fiercely contended for by SMM and DSME.
In a Feb 1 research report, CGS-CIMB analyst Lim Siew Khee thinks the project is highly likely to be awarded this year after the completion of Equinor’s acquisition of Chevron’s 40% stake in Rosebank in January.
Following Temasek’s recent $6 billion divestment of Ascendas/Singbridge to CapitaLand, investors are wondering whether consolidation among the yards is necessary. Lim sees benefits in streamlining the yards and conglomerate structures of SCI, SMM and KEP.
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“If the rig building industry does not recover in the next three years, we think the consolidation of both SMM and KEP O&M could strengthen Singapore in the large-scale FLNG (KEP) and FPSO (SMM) newbuild segment as well as create an O&M design and engineering powerhouse, competing head-on with the Koreans.
A possible structure is one mega yard (SMM + KEP O&M), one renewables/utility group Sembcorp Industries (SCI) and one urbanisation/infrastructure group (KEP).
SCI could be the long-term winner as a pure renewable energy/utility group focusing on overseas M&A to grow its capacity, commanding higher valuations.
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KEP could continue to pursue its urbanisation solutions of property and infrastructure development, backed by asset management capital.
The total book value of SMM and KEP O&M amount to $5.3 billion. The hypothetical shareholding structure of the enlarged yard could be in the form of a JV, with Temasek having a majority control stake.
CGS-CIMB has Keppel, SCI and SembMarine at “add” with target prices of $8.41, $3.49 and $2.46 respectively.
As at 11am, shares in Keppel, SCI and SembMarine are trading at $6.03, $2.57 and $1.59 respectively or 10.08, 9.51 and 51.81 times FY20F earnings respectively.
