Why SembMarine is unlikely to be privatised anytime soon

Why SembMarine is unlikely to be privatised anytime soon

By: 
Michelle Zhu
11/07/17, 09:46 am

SINGAPORE (July 11): CIMB Research is maintaining its “add” rating on Sembcorp Marine (SMM) with an unchanged target price of $1.88.

In a Tuesday report, analyst Lim Siew Khee says in the next decade, SMM could be Singapore’s only mega yard left that can compete head on with the Koreans when it comes to large-scale non-rig structures.

While Keppel mothballs its unused yards, SMM requires a sustainable order book of about $4-5 billion to keep its yards afloat.

“As at end 1Q17, SMM has only secured $75 million of orders but management is still comfortable maintaining its target of $2-3 billion wins by end-2017. We estimate that SMM is bidding for at least US$5 billion ($7 billion) of work comprising gas-related and offshore platform jobs,” notes the analyst.

Nevertheless, Lim believes that the worst could be over for SMM based on positive investor feedback observed at a recent non-deal roadshow (NDR) in Europe, as most of them "see the emergence of value” in the stock.

In addition, SMM is unlikely to be taken private as both SMM and its parent SCI are highly-geared. Privatising SMM means SCI have to take on more debt as its utilities business requires capex for new plants in Bangladesh and Myanmar.

Divesting SMM could also create a gap in SCI’s earnings, which Lim currently projects to be about 23% of the group’s profit for FY17F.

“SCI’s priority could be getting India in order. The strategic review may tackle other low-hanging fruits such as non-core operations and assets with low profits,” she adds.

Moving forward, Lim thinks there is potential for cash flow relief and write-backs from selling some of SMM’s completed rigs, which management hopes to conclude by this year and could fetch some US$170-180 million ($253-249 million) per rig.

She also estimates the company’s high-margin ship repair division to see up to $210-262 million of additional revenue per annum in FY18-19F, with the ratification of the Ballast Water Management convention (BWM) requiring ships due for dry dock after Sept 17 to be fitted with ballast water treatment systems.

“The new scope of work could add $0.5 million to $3 million per vessel. Management estimates 100-150 vessels p.a. are due for mandatory dry-dock work,” says Lim.

As at 9.44am, shares in SMM are trading flat at $1.68.

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