Analysts from UOB Kay Hian Research and CGS-CIMB Research have maintained their “buy” and “add” ratings for Sembcorp Marine with unchanged target prices (TPs) of 15.6 and 19 cents respectively, following a visit to the company’s Tuas Boulevard Yard.
In his report dated Nov 24, UOB Kay Hian’s Adrian Loh says the yard visit “reinforced” his positive view on Sembcorp Marine for 2023. “It was evident from a bird’s eye tour of Sembcorp Marine’s yard that its integrated design allows the company to carry out projects more efficiently and thus save on time and cost. This was also helped by the implementation of solar and robotic initiatives,” says Loh.
“We continue to like Sembcorp Marine given its strong potential for new order wins in 2023, especially for production assets. In the longer term, PSA’s move to Tuas will have positive spillover effects on Sembcorp Marine’s repairs and upgrades segment,” he adds.
Meanwhile, the company has also completed Phase 2 of its rooftop solar panel installation in 2022. This will be able to cater to an estimated 65% of the energy needs of its steel fabrication works, which is one of the most energy intensive parts of rig building. Hence, this should lead to slightly higher margins due to the cost savings, says Loh.
He notes that Sembcorp Marine has Phase 3 planned and this is likely to be carried out over the next two to three years as business volumes increase. Sembcorp Marine has highlighted that its steel fabrication works are almost entirely carried out by roof-mounted robots, which has led to a 30% savings in time.
Lim Siew Khee and Izabella Tan of CGS-CIMB note that Sembcorp Marine’s seven drydocks include a floating dock that can be transported for offshore structures and are capable of docking a fully constructed Very Large Crude Carrier (VLCC). “The sheer number of dry docks gives Sembcorp Marine greater flexibility in vessel reshuffling compared to its peers, such as Daewoo Shipbuilding which has 2 dry docks and 3 floating docks in its Okpo Yard,” say the analysts.
With the Sembcorp Marine and Keppel Offshore and Marine (KOM) merger terms largely in place and much of the uncertainty out of the way, Loh believes the focus on Sembcorp Marine will be the date of its extraordinary general meeting (EGM) to approve the merger with KOM, which is expected to be in January next year, and its ability to garner new orders over the next 12 months and add to its orderbook instead of its earnings in 2022.
“We understand that Sembcorp Marine may be in the running for three floating production units (FPU) in the near to medium term. Note that Sembcorp Marine delivered one semi-sub FPU to Shell for its Vito field in the Gulf of Mexico in January and is currently constructing a similar FPU for Shell’s Whale field that is also in the Gulf of Mexico,” says Loh
Given its near-term experience, he believes that Sembcorp Marine has a high chance of securing at least one of these FPUs, which he estimates to be around $350 million to $500 million in size.
“That said, Sembcorp will need to start delivering profits in 1H2023 in order to prove that it is able to reliably and profitably construct its projects. Our target book value multiple for Sembcorp Marine of 1.2x reflects our confidence that it will garner such orders, thus leading to positive share price performance,” says the analyst.
Lim and Tan estimate that Sembcorp Marine’s yard capacity currently stands at around 40% to 50%, which could be raised to 70% in FY2023, although the company explained that it is limited by supply chain bottlenecks for rare metals, copper, as well as motherboards and chips.
“Order wins secured in FY2022 are also undergoing the design and engineering stage, which typically range three to six months, according to management. Hence, we expect revenue for these projects to only be reflected by 1Q2023 or 2Q2023,” they say.
Lim and Tan’s TP of 19 cents is based on 1.6x FY2023 price-to-book value P/BV, with Sembcorp Marine trading at 1.1x 22F P/BV. Their reiterated “add” call also comes off the back of better earnings prospects in light of the upcoming acquisition of KOM.
Their potential rerating catalysts include successful integration with KOM, stronger order momentum and consistent earnings improvement, while key risks include impairments, severe cost overruns and project cancellations derailing profitability.
According to UOB Kay Hian’s Loh, the offshore construction cycle for both conventional oil and gas and renewables has room for growth in the next few years, especially given the lack of spending by the global oil and gas industry, thus constraining energy supply.
As at 2.21pm, shares in Sembcorp Marine were trading 0.2 cents or 1.5% up at 13.5 cents.