UOB Kay Hian analyst Adrian Loh has kept “buy” on Sembcorp Marine (SembMarine) with an unchanged target price of 11 cents following its order win for the construction of a wind turbine installation vessel (WTIV).
A WTIV is a vessel that’s used specifically for installing wind turbines. It can be designed as a floating vessel in the shape of a ship or a jack-up.
“We understand that SembMarine’s contract involves the latter, which is important given that SembMarine has extensive experience in constructing jack-up-like designs given its history in the offshore marine industry. Given their work in the renewable energy sector, the environmental footprint of these vessels is important, with high efficiency and low-carbon emissions essential attributes,” writes Loh in his report dated March 24.
SembMarine’s order win is the first since June 2021, where it clinched a contract for the modification work for a Floating Production Storage and Offloading vessel in Brazil in June 2021.
While the value for the current contract was not revealed in SembMarine’s announcement on March 23, Loh has estimated that the win is worth an approximate $600 million, according to checks with the industry.
The figure also references a similar WTIV order won by Keppel Corporation in 4QFY2020, which was worth $600 million.
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SembMarine’s current contract win could even be as large as $800 million depending on the specifications, he adds.
The size of the global WTIV market may be small, but it is expected to grow significantly.
To date, there are only 16 specialised WTIVs in operation globally despite the high level of demand.
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In order to fill the demand, companies have, instead, re-purposed their jack-up rigs to either install foundations or install turbines or both.
To this end, Loh expects more WTIVs to be ordered in the medium term as the market grows in size and matures, which then expands the addressable market for SembMarine.
“Importantly, the growing size of the wind turbines will also play a role in driving new orders. Historically, average wind turbine sizes have been relatively small at around 3 megawatts (MW) in 2010. However, this has grown to 8MW in 2020 with industry estimates that this would grow to 25MW by 2025. Thus, larger wind turbines will require more specialised heavy-lift WTIVs to cater to the industry’s demand,” he notes.
In addition, recent remarks from the company’s management have indicated that 2022 will be a strong year.
“During SMM’s annual results briefing at end-Febuary, management highlighted that 2022 results will be “significantly better” than 2021. In addition, the persistent labour issues in 4QFY2021 have been largely solved and thus the company will be able to handle the new order wins that are expected to be announced over the next 6-12 months,” says Loh, who also notes that the company had “kitchen-sinked” a high level of provisions in its 2021 results.
As a result, the analyst does not expect the company to be materially impacted by impairment losses in FY2022.
Loh’s current target price is based on a target multiple of 0.88x, pegged to his 2022 estimated book value per share of 13 cents. His target P/B multiple represents a 20% discount to the company’s past five-year average P/B of 1.1x.
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“Note that we had previously applied a 30% discount but we now view a lower discount as more reasonable given the expected turnaround in the company’s fortunes. With its $1.5 billion rights issue completed, and Temasek’s mandatory general offer at 8 cents a share having lapsed in early-Nov 2021, we believe that much of the corporate-level risk has dissipated,” he says.
Catalysts to SembMarine include new rig orders, as well as new orders for offshore renewable installations or fabrication works as well as repairs and upgrades work for cruise ships and other commercial vessels.
Mergers or joint ventures (JVs) with other shipyards are also re-rating factors.
As at 3.31pm, shares in SembMarine are trading 0.1 cent higher or 1.06% up at 9.5 cents, or an FY2022 P/B of 0.9x.
