SINGAPORE (May 2): DBS Vickers Securities is maintaining its “buy” call on Sembcorp Marine (SMM) with a target price of $1.78, on the notion that the sell-off post its 1Q17 results is “unwarranted”.
To recap, the marine and offshore engineering group last week posted 1Q earnings of $40 million, which was 28% lower on-year despite stabilising oil prices due to lower sales and additional cost incurred for a floater project.
In a Tuesday report, analyst Ho Pei Hwa says she continues to see re-rating catalysts ahead for SMM for the following reasons:
1. The group is a pure play to ride the oil price recovery
Ho believes a gradual recovery in oil prices and the rig market in 2017 will set the stage for rising newbuild demand. In particular, an oil price rebound above US$60/bbl will stimulate exploration and production (E&P) activities and thus rig demand, while rig attribution and cancellations will soothe the supply pressure and eventually bring the sector back to equilibrium.
2. SMM has seen sizeable new orders for non-drilling solutions
The group’s management last noted that enquiry levels for non-drilling solutions have been picking up, although the Gravifloat LNG terminal contracts have taken longer than expected to materialise. Ho highlights that SMM is currently in active discussions with several potential customers for Gravifloat LNG terminals, and remains hopeful of securing new orders for the product this year.
3. Disposal of jackup rigs to eliminate key overhang
SMM currently has seven outstanding jackup rig orders, out of which the group is in talks with potential buyers for five of them. One BOT lease unit is likely to be delivered to its customer next year, while another rig has been terminated by Marco Polo. Ho believes the five rigs have been marked down by about 30% through provisions made in 4Q15, and says the successful disposal of the rigs at breakeven price or above would free up capital, hence eliminating a key overhang on SMM.
4. Reactivation of Sete Brasil’s projects
About 43% of drillship projects from SMM’s orderbook, which stood at $7.14 billion as at March 2017, are with Sete Brasil. Ho says the successful restructuring of Sete Brasil will allow the rig owner to obtain financing for its rigbuilding programme, which will eliminate an overhang on the rigbuilders.
5. Potential as an M&A play
In the event of Singapore shipyards’ consolidation, SMM stands to benefit from any privatisation or merger and acquisition (M&A) opportunities that could arise as a result. Noting that the rigbuilding sector continues to face structural issues with yard overcapacity and rig oversupply, Ho says a merger could make sense to further streamline operations, achieve cost synergies and eliminate competition in the medium-term.
Looking ahead, DBS is expecting sizeable contracts for LNG solutions to come through for SMM in the next few months, with order wins set to rise over the year given several modularised LNG terminal contracts in the pipeline.
“We expect these to drive SMM’s order wins to $2 billion in 2017,” comments Ho.
“SMM has been reportedly in final talks with Chinese conglomerates Poly Group and GCL Group for LNG solutions, as well as Global LNG for a gigantic LNG vessel. This will buck the declining orderbook trend, which has dipped to S$4.02bn (excluding $3.12 billion Sete orders) in 1Q17.”
As at 4:45pm, shares of SMM are trading 0.31% higher at $1.64.
