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Analysts positive on SembMarine after EGM, management updates

Felicia Tan
Felicia Tan2/1/2023 05:52 PM GMT+08  • 6 min read
Analysts positive on SembMarine after EGM, management updates
SembMarine's EGM is scheduled to take place on Feb 16.
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Analysts are remaining positive on Sembcorp Marine’s (SembMarine) S51 %

prospects after the company announced that its extraordinary general meeting (EGM) will be held on Feb 16 at 11am.

The EGM will see SembMarine’s shareholders voting for or against the proposed merger with Keppel O&M as well as the proposed allotment and issuance of consideration shares from Keppel O&M.

In SembMarine’s circular released on Jan 31, the company announced that independent financial advisers, Provenance Capital, called the terms of the proposed merger “fair and reasonable”, adding that SembMarine’s shareholders should vote in favour of the merger.

SembMarine will have to achieve over 50% in value of approvals from its shareholders, excluding Temasek Holdings’ approval, for the acquisition of the restructured Keppel O&M group at the EGM.

The completion of the acquisition is slated to take place on or before Feb 28.

“We expect Keppel Corporation to distribute [a] dividend in specie of 19:1 of SembMarine and Keppel Corporation shares on Feb 17 or 20,” say CGS-CIMB Research analysts Lim Siew Khee and Izabella Tan. The date of the distribution has yet to be announced.

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New board and management

A new board and management has been announced for the enlarged entity, as the existing SembMarine directors, except Yap Chee Keong, will be stepping down upon the completion of the merger.

Chris Ong Leng Yeow, the CEO of Keppel O&M and the managing director of Keppel Renewable Energy, has been proposed to be the enlarged entity’s CEO and executive director.

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Mark Gainsborough, a co-founder and chairman of Low Carbon Advisors, is the proposed new chairman.

SembMarine’s current president and CEO Wong Weng Sun will also be stepping down from his role. He will, however, be remaining as a senior adviser to the proposed board for an interim period.

“[This] would be an opportune time to bring new perspectives to the group focusing on offshore renewables, new energy and cleaner solutions in the offshore and marine sector,” note Lim and Tan.

“Having successfully delivered all its key projects, built up a sizable net order book of more than $7 billion, and with its strategic yard capabilities and technology bench strength, the company is well positioned for the new board to steward the enlarged group to greater heights,” says SembMarine in its Jan 31 circular.

Following the announcement, CGS-CIMB’s Lim and Tan have kept their “add” call on SembMarine with an unchanged target price of 19 cents.

“Our target price is based on our 1.6x FY2023 P/BV (the average trading band since the oil price crash in 2015),” they write.

The way they see it, the enlarged SembMarine could focus on renewables and gas solutions. Both SembMarine and Keppel O&M had secured one new contract each since the merger terms were revised on Oct 27, 2022.

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“We estimate the current combined orderbook to be at $19.0 billion, and year-to-date (ytd) combined order wins at $130 million from Keppel O&M’s offshore substation contract with Orsted,” say Lim and Tan.

Based on SembMarine’s 1HFY2022 results, the analysts estimate that the proforma enlarged book value is at $8.35 billion. The book value per share (BVPS) based on the enlarged share base could be at 12 cents, they add.

To them, potential re-rating catalysts include a successful integration with Keppel O&M, stronger order momentum, and consistent earnings improvement.

Meanwhile, key risks include impairments, severe cost overruns, and project cancellations derailing profitability.

Approval for merger is next catalyst for SembMarine: HSBC

HSBC Global Research analyst Rahul Bhatia is also keeping his “buy” call with an unchanged target price of 20 cents.

To him, the next catalyst for SembMarine is the approval from its shareholders for the merger at its EGM.

Calling the new proposed board “eclectic”, Bhatia lists four reasons behind his positive view on SembMarine. This includes SembMarine’s new order outlook, especially on its floating production system (FPSO) order, as well as synergies from the proposed O&M merger.

“We forecast $1.5 billion of synergies that we incorporate into our valuation,” says Bhatia.

An estimated turnaround in its financials is also a plus for the company. With the merger, SembMarine is set to move from a loss-making standalone entity in FY2022 to one with over $1.0 billion in profit in FY2025.

“We forecast a complete overhaul of the financials from 2023 driven by the combination of new order wins and synergies from the merger,” says Bhatia.

Finally, the new entity, which is estimated to come in at $13.6 billion following the merger, with a free float of $8.0 billion, should drive index inclusions for SembMarine.

In his report dated Feb 1, Bhatia sees “multiple catalysts” which include the completion of the merger by the end of February. New contract wins and index inclusions are also upside risks to SembMarine’s share price, he notes.

On the other hand, he is cautious about celebrating the merger too early as the approval from SembMarine’s shareholders “has yet to happen”.

He adds: “Once the merger is completed, the number of SembMarine shares will more than double to 68.2 billion, which could drive short-term volatility in the share price.”

Better clarity on timeline of deal and future management team to reduce overhang: PhillipCapital

PhillipCapital analyst Terence Chua has kept "buy" on Keppel Corporation with an unchanged target price of $8.95 after SembMarine's EGM announcement.

To Chua, better clarity on the timeline of the deal, as well as the announcement of the future management team will reduce the overhang on Keppel's shares. BN4 %

"The new enlarged group will also be able to better capitalise on the energy transition," he says.

"With changes made to the Asset Co transaction, we believe management can now forge ahead to further de-risk its legacy rig assets. Management disclosed that it continues to receive active enquiries for its legacy rigs on the back of a more favourable environment. The completion of the Asset Co transaction is expected to take place on or prior to Feb 28," he adds.

Shares in SembMarine S51 %

closed 0.1 cent lower or 0.7% down at 14.1 cents on Feb 1.

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