KGI Securities analyst Joel Ng is maintaining his “neutral” recommendation on Sembcorp Marine. He has also slashed his target price on the stock to 23 cents from $1.19 previously as valuations bottom out, and as the selling pressure abates ex-rights.

“The year ahead looks challenging as the company grapples with industry overcapacity, weak profit margins and poor order book visibility,” Ng writes in a report dated August 20.

“We believe earnings are less likely to drive its share price performance going forward. Focus will instead be on the restructuring of Singapore’s offshore & marine (O&M) industry in 2020 and likely involve a deal with Keppel Corp’s O&M business,” he adds.

On August 19, trading of Sembcorp Marine’s 5-for-1 rights (which translates to five rights for every one share) began. Trading of these shares will end on August 27 at 5pm.

Investors holding the rights will have till September 2 to accepts the rights shares and make the necessary payments. Trading for the rights shares will begin on September 11.

The company launched a $2.1 billion renounceable rights issue on June 8 in a bid to beef up its balance sheet. This was followed by a demerger between itself and its parent company Sembcorp Industries via a distribution in specie of the 61% stake held by the latter.

SembMarine’s 5-for-1 rights issue is priced at 20 cents per share.

After the completion of the demerger from Sembcorp Industries, SembMarine will have $600 million of extra cash in addition of the $1.5 billion of debt from Sembcorp Industries converted into equity.

“SembMarine’s balance sheet will be in a much healthier position after the rights as net gearing drops to 0.5x,” says Ng.

On the merger between SembMarine and Keppel O&M, Ng expects the consolidation to “take shape this year, with the backing of Temasek Holdings”.

The likely scenario, Ng says, is for SembMarine to acquire Keppel O&M.

“This will complete the restructuring of Singapore’s O&M sector and would be the best outcome for all stakeholders. The consolidation of Singapore’s two largest yards would lay the proper foundation for the long-term, by pooling together resources and enlarging the balance sheet,” he says.

“A bigger balance sheet will enable the combined entity to embark on much larger projects and fully utilise the capacity of SMM’s mega yard in Tuas,” he adds.

Looking ahead, Ng estimates that SembMarine is expected to remain “loss-making” in FY20F and FY21F, but attention will likely focus on the consolidation of Singapore’s two largest shipyards over the coming quarters.

Shares in SembMarine closed 0.5 cents lower, or 2.4% down, at 20.5 cents on August 20.