SINGAPORE (Feb 23): DBS is maintaining a "buy" on Sembcorp Marine, urging investors to look beyond the group's weak near-term earnings.
The research house likes SembMarine for being a key proxy to the recovery in the Oil & Gas and Offshore & Marine sectors, with strong order wins as key re-rating catalyst.
In the near term though, DBS analyst Ho Pei Hwa says that sentiment might be adversely affected by the wider-than-expected losses in 4Q17 and now that privatisation is not part of Sembcorp Industries' strategic review.
See: Sembcorp to list India energy unit on BSE, NSE after strategic review; reports 84.6% fall in 4Q earnings to $22.8 mil
"Maintain 'buy' with lower target price of $2.90 after earnings revisions, still based on higher 2.4 times FY18 book value," says Ho.
According to Ho, order wins, a critical leading indicator for earnings recovery, is set to rise in the next 12 months. She expects SembMarine's strong order pipeline would translate into $3 billion in new orders in 2018.
This could include a semi-submersible production unit for Shell’s Vito at $400-800 million; Newbuild FPSO for Energean’s Karish-Tanin project at $500 million; two large Compressed Gas Liquid carriers for SeaOne Caribbean totalling $800 million and a Gravifloat modularised LNG exporting terminal for Poly-GCL at $1 billion.
Meanwhile, the landmark deal to sell all nine terminated jackup rigs to Borr Drilling and the disposal of harsh environment semisubmersible rig West Rigel have eliminated a key overhanging concern on SembMarine.
The restructuring of customer Sete Brasil is also closer to a resolution, pending approval of the revised restructuring proposal submitted at end Aug 2017, adds H.
"We believe Singapore rigbuilders are well-positioned to deliver at least 4-5 rigs each out of Sete Brasil’s existing 13 orders at $1 billion each. The reactivation of rig construction will be another re-rating catalyst," says Ho.
DBS has a target price of $2.90 is based on 2.4 times FY18 book value which has already been beaten down after the massive $609 million provisions taken in FY15.
As at 12.43pm, shares in SembMarine are down 10 cents at $2.23.
