SINGAPORE (May 14): Analysts are mostly neutral on Sembcorp Marine (SembMarine), but with hopes that a restructuring within the Sembcorp-Keppel Group will help the company.
Yesterday, SembMarine announced its interim business update for 1Q20, which reported that the company has been adversely affected by the Covid-19 pandemic. Measures to contain the pandemic have severely disrupted transportation, supply chains, manpower access and plant operations, with resulting reduction in the demand for oil and energy.
A separate major development has been the collapse in oil prices from March 2020. The current low and volatile oil price levels have resulted in major oil companies deferring their final investment decisions (FIDs) for projects and cutting their capital expenditure (CAPEX) significantly for 2020.
This in turn, has led to low overall business volume, and impacted SembMarine’s revenue recognition and bottom-line performance. The company expects losses to continue in the "foreseeable quarters".
See: Sembcorp Marine 'adversely affected' by oil slump and pandemic, losses to continue
On the back of this, CGS-CIMB's analyst Lim Siew Khee is maintaining her “hold” recommendation on the stock with a target price of 80 cents from $1.20 previously.
In a Wednesday report, Lim says, “There are no real catalysts in the near term but our hold call is premised on hopes of restructuring within the Sembcorp/Keppel group.”
SembMarine’s business has been severely hit by both the Covid-19 pandemic and the lower oil price. The company expects its trend of losses to also continue.
Hence, Lim has cut SembMarine’s orders forecast to $300 million, similar to 2016’s order win of $320 million. Factoring lower orders, higher finance costs and weaker operating leverage, SembMarine’s EPS has also been cut by 37% to 465% for FY20-22.
DBS Group Research’s analyst Ho Pei Hwa also has a “hold” call on SembMarine with a target price of 72 cents from $1.35 previously.
“The industry setback will take a toll on near-term order win momentum but accelerate industry consolidation, in our view. While any potential restructuring between Singapore rigbuilders will take time and it is premature to assess the impact without further details, Sembcorp Marine tends to be perceived as a beneficiary,” says Ho.
The analyst believes that the yard merger via share-swap or asset injection into SembMarine are more probable scenarios than privatisation, and therefore trickier to predict SembMarine’s financial and share price impact.
Fundamentally, the critical factor for SembMarine remains its order wins to restore confidence.
RHB Group Research’s analyst Leng Seng Choon is more bullish on SembMarine as he has a “buy” recommendation with a target price of $1.28 from $1.45 previously.
Although the company has reported a weak 1Q20 business volume, Leng believes that this has already been priced in.
“While there are major headwinds, market expectations of restructuring could lift SembMarine’s share price, especially upon release of further newsflow. Even if restructuring is not factored in, we believe there is limited share price downside given the current steep P/B discount vs historical norms,” says Leng.
As at 2.35pm, Sembcorp Marine shares are changing hands at 0.69 cents, down 2.8%.
