SINGAPORE (Jan 3): OCBC Investment Research has upgraded its call on Sembcorp Marine (SMM) to “hold” from “sell” previously with a higher fair value estimate of $1.78 from $1.74 previously.
This follows the group’s share price correction of 5% to $1.85 on 29 Dec from $1.94 on 22 Dec in response to news of ongoing bribery charges in Brazil, before benefitting from strong oil prices to close at $1.87 on Tuesday.
To recap, SMM’s larger rival Keppel Corporation announced last Saturday that its O&M unit will pay a fine of $570 million to resolve Brazilian bribery charges, following which its share price fell to $7.29 on 26 Dec from $7.34 on 22 Dec, but recovered subsequently to close even higher at $7.53 Tuesday.
The incident has brought SMM into question as to whether it will face a similar penalty, as the group was named among the foreign companies that did business people who are currently under investigation in Brazil.
In a Wednesday report, lead analyst Low Pei Han opines that the share price divergence between SMM and Keppel Corp could be likely due to the former’s offshore & marine (O&M) pure play status and relatively smaller asset base.
She notes that the fine, should it be imposed on SMM, will compromise a larger proportion of SMM’s net asset value (NAV) than it did for Keppel Corp.
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OCBC previously estimated that a similar fine would knock off about 22.6% of SMM’s 3Q NAV as compared to the US$422 million ($567 million) fine accounting for 4.5% of Keppel’s 3Q NAV.
See: Keppel bribery fine puts spotlight on peer Sembcorp, shares slide
Low recalls that while SMM announced its plans to sell its semi-submersible rig West Rigel at US$500 million, an estimated $24 million loss will be booked by the group should the sale materialise.
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Nonetheless, Low highlights how West Rigel’s sale price is only 12% lower than the US$568 million price tag that was agreed on with the original owner, Seadrill’s North Atlantic Drilling – which illustrates the relative resilience in prices for quality assets built by yards such as SMM.
See: Buyer for West Rigel rig found but graft probe still weighs heavy on SembMarine
Like in the case of Keppel Corp, she does not expect SMM to see any operational impact should it face a similar financial penalty as a result of the investigations.
“Meanwhile, oil prices have remained at relatively healthy levels, and posted their strongest opening to a year since 2014 yesterday; consensus for Brent (according to Bloomberg) is looking at US$65/bbl for 2018. We tweak our P/B multiple slightly from 1.8x to 1.85 times and our fair value estimate rises from $1.74 to $1.78,” says Low.
As at 12.51pm, shares in SMM are trading flat at $1.87 or 42.6 times PER.
