UOB Kay Hian analyst Adrian Loh has upgraded Sembcorp Marine (SembMarine) to “buy” as he deems that much of the negatives have already been priced in.
That said, Loh has lowered his target price to 11 cents from 12.4 cents as he has pegged it to a target multiple of 0.74 times FY2022. The target multiple is a 30% discount to SembMarine’s past five-year average price-to-book (P/B) of 1.07 times.
“In our view, we believe this discount is a reasonable reflection of the industry risks that SembMarine faces in at least the next 12 months,” writes Loh in a report dated Sept 6.
Even so, Loh’s target price represents a 28% upside to the counter’s last-closed price of 8.6 cents.
“We have assumed that the company’s rights issue successfully raises $1.5 billion, which results in a FY2022 estimated book value per share of 14 cents,” he writes.
“Post its $1.5 billion rights issue, SembMarine should be in better shape to weather market conditions over the next 12-18 months and hopefully enable it to garner new orderflow,” he adds.
During SembMarine’s extraordinary general meeting (EGM) on Aug 23, the majority of the group’s shareholders indicated that they were in favour of the rights issue.
Temasek Holdings, which owns 43% of SembMarine, had pledged to subscribe for the latter’s pro-rata entitlement as well as excess rights. This means the former will take up as much as 67% – or $1 billion – of the rights issue.
DBS Group Holdings had undertaken to underwrite the remaining 33%.
While a mandatory general offer will be triggered, Temasek had indicated that SembMarine will remain a listed company.
To Loh, the rights price, which closed at 0.2 cents on Sept 3, is worth it, to investors.
However, investors buying into SembMarine’s rights issue should “exercise a considerable amount of patience” as the timing in the upturn in the offshore renewables and marine industry remains uncertain.
That said, there has been good news from one of SembMarine’s largest debtors, Borr Drilling, which secured some medium-term work for its jackup rigs.
Borr’s results for the 2QFY2021 ended June also “appeared decent” with a 13% q-o-q increase in operating revenue to US$55 million ($73.7 million).
For the FY2021, Loh has kept his earnings estimates unchanged, although he has lowered his earnings estimates for the FY2022.
“Our loss expectations [are] now at $133 million vs a loss of $66 million previously, as we forecast the industry upturn to be longer than expected,” he says.
Potential downsides for SembMarine include a more prolonged trough cycle for the offshore marine industry on the back of the oversupply of rigs, which could continue to depress utilisation rates and dayrates.
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Other downside factors include “a persistent lack of demand for drilling rigs if oil companies continue to hold off on offshore capex spending, and a prolonged Covid-19 endemic which continues to crimp supply of labour for SembMarine’s shipyards,” says Loh.
“To quantify the potential downside, we note that SembMarine’s trough P/B in the past 10 years was 0.32 times, which implies a valuation of less than 5 cents. Currently, SembMarine trades at 0.6 times P/B for 2022, which is more than -1 standard deviation (s.d.) below its five-year average.”
Share price catalysts to the counter include the successful raising of $1.5 billion via its rights issue, new orders, mergers, or joint ventures with other shipyards, he adds.
As at 11.19am, shares in SembMarine are trading flat at 8.6 cents, with an FY2021 P/B of 0.2 times.
