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Keppel, Sembcorp, Sembmarine’s pivot from O&M industry still nascent

Jeffrey Tan
Jeffrey Tan12/18/2020 07:00 AM GMT+08  • 8 min read
Keppel, Sembcorp, Sembmarine’s pivot from O&M industry still nascent
All three companies, which had benefited immensely from operating in the O&M industry, will be doing so less going forward.
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This year has been pivotal for Keppel Corp, Sembcorp Industries and Sembcorp Marine (Sembmarine). All three companies, which had benefited immensely from operating in the offshore and marine (O&M) industry for many years, will be doing so less going forward.

Sembmarine, which was a former subsidiary of Sembcorp housing the O&M business, has been cut loose by the latter. In fact, Sembmarine, which has traditionally been involved in rig building and offshore platform fabrication, is expanding its diversification into the gas and renewable energy (RE) industries. And Keppel is currently undergoing a strategic review of its O&M business that could see the latter being sold off.

The reasons for retreating from the O&M industry are obvious. The oil industry has been in the doldrums since the mid-2014 crash in crude oil prices. As prices of black gold remained low, exploration and production projects have been slashed. Inevitably, rig building, offshore equipment fabrication and maintenance contracts, too, have dwindled. As a result, the fortunes of Keppel, Sembcorp and Sembmarine have fared for the worst over the last six years.

The onset of the Covid-19 pandemic had only made things worse. Measures to prevent the spread of the virus had unfortunately come at the expense of economic activity. This led to expectations of lower oil demand going forward.

Then, the squabble among the world’s major oil producers earlier this year also did not help. Russia — one of the world’s largest oil-producing countries — snubbed Saudi Arabia’s proposal to collectively cut oil production in view of weak demand. In retaliation, Saudi slashed its export prices to increase market share.

As a result, crude oil prices, which were trending between US$60 to US$70 per barrel, plunged to about US$30 per barrel. In fact, certain futures of the West Texas Intermediate (WTI) crude shockingly traded in the negative region for a brief period. But as of Dec 14, the WTI and Brent crude prices have rebounded to US$46.99 and US$50.29 respectively, though they are a far cry from their lofty days of above US$100 a barrel.

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Given the prolonged downturn that seems to have no end in sight, Sembcorp has been expanding its utilities business to transform itself into an integrated energy player. This strategy — as the company hopes — would allow it to benefit from the global transition towards renewable energy.

To that end, Sembcorp invested in several companies involved in thermal power, gas importation and retail as well as regas infrastructure. It also invested in companies that focus on renewable energy, and water and wastewater treatment. Apart from that, the company divested off some of its prior investments that are not in line with its new strategy.

Keppel, too, has begun to reinvent itself. Under Vision 2030, the company plans to focus more on renewable energy, environmental solutions, nearshore floating infrastructure, connectivity solutions including green data centres, as well as integrated smart district development. The aim is to become an integrated company that would provide solutions for “sustainable urbanisation”. In other words, Keppel would transform into a property developer that will draw on synergistic benefits from its other businesses.

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Meanwhile, Sembmarine has been focusing on securing more liquefied natural gas (LNG) projects to diversify its revenue stream. The company tried to win over new customers in the wind energy market by making offshore platforms for them.

Progress or not?

Thus far, the shift in direction at Keppel, Sembcorp and Sembmarine are at different stages of progress.

Things appear challenging at Sembcorp as the company is beset by impairment losses. In a Dec 7 profit guidance, the company says the impact of Covid-19 and challenging market environment has led it to incur total impairments of $89 million for 2HFY2020 ending Dec 31. This, it explains, arises from its periodic assessment of the recoverable amounts based on expected future cash flows of its wastewater and power assets.

On top of that, Sembcorp will record a noncash, non-recurring loss of about $1.12 billion arising from the disposal of Sembmarine via the distribution in specie of the latter’s shares. This resulted from the fair value of the distribution in specie as at Sept 11 of $1.6 billion being lower than Sembmarine’s carrying amount of $2.72 billion as at June 30. The loss will be adjusted based on the carrying value of Sembmarine shares up to Sept 11, says the company.

As a result, Sembcorp expects to incur losses for FY2020 ending Dec 31. However, the company believes it will maintain positive operating cash flow in 2020 underpinned by the underlying profitable performance of its energy and urban businesses.

At Keppel, the company has yet to announce the outcome of its strategic review of the O&M business held under its subsidiary Keppel Offshore & Marine (Keppel O&M). The company says it is exploring a variety of organic options. These include reviewing the strategy and business model of Keppel O&M, assessing its current capacity and global network of yards, and restructuring to seek opportunities as a developer of renewable energy assets. It will also explore inorganic options that would range from strategic mergers to disposal.

While Keppel did not provide a specific timeline on when it will conclude the strategic review, CEO Loh Chin Hua said a decision should take “months” from the company’s Sept 29 briefing. But according to Phillip Securities, the outcome is understood to be made known “at the end of 100 days”. “We expect an announcement in January 2021,” Phillip senior analyst Terence Chua writes in a Dec 2 note.

In the meantime, Keppel has announced several key leadership changes at its business units as part of succession planning and leadership renewal. The company says the next-generation leaders are part of the team that formulated Keppel’s Vision 2030. All leadership changes will take effect from Feb 15, 2021, it notes.

As for Sembmarine, the company says it is “actively tendering” for more than 10 projects, especially in the greener energy market segments such as renewable energy and gas solutions. A similar number of tenders are also in progress for the process solutions segment, the company adds. These include floating production storage and offloading units, floating storage and offloading units and floating production units. The company says it is currently executing a total of $1.78 billion worth of projects, including its drillship projects.

Sembmarine’s performance, however, did not see an improvement. In its Nov 11 business update, the company says it continued to incur losses for 3QFY2020 ended Sept 30, no thanks to low overall business volume and execution delays.

Share prices mixed

So, what should investors do? Shares of Sembcorp are up 48.7% as at Dec 14. Although shares of Keppel have regained some lost territory in the last few months, the counter is down 25.1% year to date as of Dec 14. Shares of Sembmarine have performed worst though — down 81.6% as of Dec 14.

Analysts are optimistic about Sembcorp and Keppel. UOB KayHian has maintained its “buy” rating for Sembcorp with a higher target price of $2.02 from $1.66 previously. The brokerage believes that the company is “well-positioned” for recovery in 2021.

UOB KayHian points out that the divestments made by Sembcorp over the past three years should allow for better allocation of capital and resources in the future. These include those from the Americas — Panama and Chile — where the company has pulled back its interests, it notes.

Moreover, the company’s earnings capability is now more “transparent” without the “fog” of Sembmarine’s losses. In addition, the news of successful vaccine trials from Pfizer and BioNTech, as well as Moderna have led to higher certainty that the global economic recovery postCovid-19 may be swifter than expected.

Phillip Securities has initiated coverage on Keppel with a “buy” rating and target price of $6.12. It says the company’s strategic review of Keppel O&M and Vision 2030 are expected to put it firmly on the road to a ROE target of 15%.

“A key part of its Vision 2030 is breaking down the silos within the group to achieve OneKeppel. We believe this will enable the group to achieve greater scalability, better, synergies and new profit pools that might not be available to individual business entities, nudging it towards its ROE target,” says Chua of Phillip Securities.

However, analysts are less optimistic about Sembmarine. Although the company’s yards are back to full capacity and its repairs and upgrade business is busy, the company has not won new orders this year, UOBKH points out. Instead, it is witnessing delivery delays into 2021, which will affect its near-term working capital and cash flow, the brokerage says.

Nevertheless, UOBKH has upgraded Sembmarine to “hold” on valuation grounds, albeit with a lower target price of 12.5 cents from 15.4 cents previously. The brokerage does not believe it is time to buy the stock 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 [a 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,” UOBKH analyst Adrian Loh writes in a Nov 12 note.

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