Analysts have had a mostly bearish reaction to Sembcorp Marine’s (SembMarine) announcement of its proposed $1.5 billion rights issue, which it announced the same day it inked a memorandum of understanding with Keppel Offshore & Marine for a potential merger.
See also: SembMarine seeks to raise $1.5 bil through rights issue; enters into MOU with Keppel O&M on potential merger and Sembcorp Marine and Keppel begin long-awaited merger talk of O&M business
OCBC Investment Research downgraded its call for SembMarine from “hold” to “sell”, with a lower target price of 9 cents. UOB Kay Hian also reduced its target price to 12.4 cents, while maintaining a “hold” rating.
Meanwhile, CGS-CIMB Research maintained its “hold” rating with an unchanged target price of 22.6 cents.
UOB Kay Hian analyst Adrian Loh says the proposed rights issue - which comes just seven months after SembMarine’s $2 billion rights issue in September 2020 - will be “painful for minority shareholders”.
His lower target price of 12.4 cents, down from 18 cents previously, equates the company’s theoretical ex-rights price.
He points out that SembMarine’s share price plunged 27% to 13.9 cents on June 25. “At these levels, we believe that existing shareholders should subscribe to the rights,” he says.
However, Loh also cautions it may be a tumultuous ride for the next 12 months. “In the longer term, the merger (if successful) is positive and necessary, but short-term challenges remain,” he says.
SembMarine’s headwinds include supply chain and manpower shortages, the slow recovery of the offshore marine industry, and ongoing financial losses. Loh expects SembMarine’s financials to “remain poor” for the next two to three quarters.
He believes new orders for rigs, offshore renewable installations or fabrication works as well as the loosening of inbound travel rules and improved supply of manpower will be potential share price catalysts for SembMarine.
OCBC Investment Research highlights that since April 9, SembMarine’s share price has corrected by 5%, compared to a 2.2% decline for the Straits Times Index.
That, along with the impending rights issue, has prompted the OCBC research team to downgrade its rating, with a lower target price of 9 cents, from 20 cents previously. “We update our estimates and use a slightly higher P/B multiple of 0.8 times on account that a combined entity [with Keppel O&M] would be a stronger player in the global arena, but lower our fair value to 9 cents to take into account effects of the rights issue,” the team writes in a June 25 report.
While the team highlights that losses are still expected going forward based on SembMarine’s orderbook, they anticipate more order wins on the horizon, albeit cautiously. “Looking ahead, we expect news of more order wins but investors are advised to look beyond the headline numbers for Sembcorp Marine’s share in a consortium contract, as well as the margins behind it,” the team remarks.
Meanwhile, CGS-CIMB Research analyst Lim Siew Khee has kept her “hold” rating for SembMarine with an unchanged target price of 22.6 cents.
In a June 25 sector research note, Lim opines that in the near term, the merger is more positive for Keppel Corporation than it is for SembMarine, given that the former is finally exiting O&M.
See also: Analysts cheer merger between Keppel and SembMarine with TP estimate on Keppel of at least $6.20
Lim points out that post-merger, the combined entity will be the only mega yard in the region, largely backed by Temasek with a potential orderbook of $7-8 billion and capabilities spanning across repairs, rig building, and offshore renewable energy.
Nonetheless, similar to Loh, Lim says shareholders will have to stomach near-term challenges, including integration costs for the combined entity and uncertainties on the sector’s recovery.
She has kept her “overweight” rating for the sector, with Keppel remaining as her top pick.
Shares in SembMarine closed down 0.6 cents or 4.32% lower at 13.3 cents on June 28.
