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UOB Kay Hian upgrades Sembcorp Marine to 'hold' on valuation grounds while CGS-CIMB maintains 'hold' due to net current liability position

Felicia Tan
Felicia Tan • 4 min read
UOB Kay Hian upgrades Sembcorp Marine to 'hold' on valuation grounds while CGS-CIMB maintains 'hold' due to net current liability position
As at 4.23pm, shares in SembMarine are trading 0.2 cent lower or 1.5% down at 12.9 cents.
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UOB Kay Hian analyst Adrian Loh has upgraded his recommendation on Sembcorp Marine (SembMarine) to “hold” despite the company’s continued losses reported in its 3QFY2020 update, on “valuation grounds”.

“With the company continuing to incur losses in 2HFY2020 and likely into 1HFY2021, we do not see a reason to own SembMarine yet,” he says.

In its update, SembMarine said that on top of the losses incurred in the 3QFY2020 and 9MFY2020, the company expects losses to continue into the 4QFY2020 as its Singapore yards gradually resumed production activities since July 2020.

On that, Loh has reduced SembMarine’s target price to 12.5 cents from 15.4 cents previously, and cited an entry price to the counter at 10.5 cents.

“While its yards are back to full capacity and its repairs & upgrade business is busy, the company has not won new orders this year. Instead, it is witnessing delivery delays into 2021 which will affect its near-term working capital and cash flow,” he notes

Due to these factors, Loh has maintained a cautious stance due to the headwinds in the offshore & marine (O&M) industry.

See: UOB Kay Hian lowers earnings estimates, target price for Keppel Corp despite $200 mil contracts

“Day rates and utilisation rates for rigs have continued to deteriorate in 2HFY2020 and chances of a recovery in the O&M sector in the near term remain low, in our view,” he says.

“The industry outlook remains challenging and new order flow may only resurface in 1HFY2021 at the earliest, in our base-case scenario. This reinforces our view that an upcycle is more than two years away,” he adds.

To this end, Loh does not believe investors should buy into SembMarine yet, “given that it is a second-derivative play on oil prices”.

“We believe the fundamentals behind an oil price increase need to be solid and that the oil prices need to be at least above US$50 ($67.29)/barrel over a long enough period for oil companies to have the confidence to spend on offshore exploration. In our view, current oil prices are not high enough for exploration capex to resume in a meaningful way while rigs are in oversupply globally,” he says.

“We roll valuation to 2021 and apply a 0.7x price-to-book (P/N) to our 2021F tangible book value of 17.8 cents/share. We believe a material discount to the past 5-year average P/B of 0.96x is reasonable, given that the company faces uncertainty as to when new order wins may materialise in a meaningful fashion. We highlight that its past-five-year trough P/B of 0.6x equates to 10.7 cents/share,” he adds.

CGS-CIMB’s Lim Siew Khee, who has maintained her “hold” call on SembMarine as the company says it expects to return to net current assets in FY2021F even though it remains in a net current liability position as of 3QFY2020.

While she has upped her target price to 13.9 cents from 12.9 cents previously to reflect SembMarine’s latest $2.1 billion rights issuance, she has reduced her earnings per share (EPS) estimates for FY2020-FY2021F to “reflect slower execution and lower margins”.

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Even though SembMarine’s yard activities have resumed in early July and are now operating at close to its full workforce capacity of 20k compared to its pre-Covid-19 numbers, delivery dates for most of its existing projects have been rescheduled by three to 12 months, though there has been no project cancellations.

“Therefore, we gather that SMM is focusing on resuming these projects instead of aggressively chasing new projects, albeit the bidding landscape has improved q-o-q,” Lim notes.

“Our order assumptions for FY2020F and FY2021F of $300 million and $500 million, respectively, remain intact. We estimate increased working capital needs to execute stalled orders and expect net gearing of 0.68x by end-2020F,” she adds.

Lim has also identified protracted order drought and cost overruns as key downside risks to SembMarine, and says “sizeable order wins” could re-rate the stock.

As at 4.23pm, shares in SembMarine are trading 0.2 cent lower or 1.5% down at 12.9 cents.

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