Sembcorp Marine - Closer To Becoming The Largest Regional Yard
- No more Bayberry but Sembcorp Marine directly acquires Keppel Offshore & Marine (KOM) – See
- We think the revised terms work in slight favour of Sembcorp Marine. The number of shares to be issued by Sembcorp Marine will be reduced by 3.1bn to 36,848m (previously 39,950m) with enlarged share of 68.237m (previously 71.34m). No court approval is required for the transaction but simple majority shareholders approval by Sembcorp Marine and Keppel Corporation (SGX:BN4). Temasek will retain its stake of 35.5%.
- The simplified transaction structure’s revised terms appear to have improved and reflect possible previous pushback from Sembcorp Marine’s minority interests. Sembcorp Marine’s proforma NTA/share improves ~5% from S$0.065 to S$0.068 based on the enlarged entity based on FY21 NTA of S$4.6bn.
- See also report: Offshore & Marine - CGS-CIMB Research 2022-10-05: S$18.6bn Orderbook For The SMM KOM Combined Entity. Combined year-to-date order wins for newbuilds for both Sembcorp Marine and KOM amount to S$14.25bn (S$8.1bn for KOM and S$6.15bn for Sembcorp Marine), bringing combined order book to ~S$18.57bn. This is a key driver to lead Sembcorp Marine to profitability, potentially by FY24F.
- Based on previous peak in 2013, the combined order book for both Sembcorp Marine and KOM was S$26.5bn. Peak combined net profit and revenue for both were S$14bn and S$1.6bn, respectively, in 2014. As such, we believe the run-rate of revenue and profit based on the proforma orderbook post-merger could gradually reach S$5bn-6bn and conservative net margin of 3-5%, yielding profit of S$160m to S$280m per year.
- We were previously concerned about Sembcorp Marine grappling to restructure the combined entity (Bayberry) for growth as its end-2021 order book was only at ~S$1.3bn vs Keppel Corporation’s S$5bn. With the change in structure, we think the management control and strategy should remain with Sembcorp Marine.
- Integration risks could be minimal as both Sembcorp Marine and KOM now service a common single largest customer – Petrobras (~76% of combined order book). In fact, we expect cost optimisation for materials and equipment procurement, leading to margin expansion.
- Upgrade Sembcorp Marine to ADD with higher target price of S$0.19. Sembcorp Marine's share price traded at an average of 2-4x P/BV in 2013-2016 during the peak cycle. We now use 1.6x P/BV or the average trading band since the oil price crash in 2015. It also represents a 50% discount to the average peak cycle. Our EPS have not factored in the enlarged share base and merger numbers.
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
LIM Siew Khee CGS-CIMB Research | Izabella TAN CGS-CIMB Research | https://www.cgs-cimb.com 2022-10-28 2022-10-28
Read also CGS-CIMB's most recent report:
2022-11-15 Sembcorp Marine - Yard Capacity To Return To 70% In FY23
Check out the most recent target prices at Sembcorp Marine Target Prices. Listing of analyst research reports at Sembcorp Marine Analyst Report.
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