Citi Research analyst Jame Osman is keeping his “sell” call on Sembcorp Marine (SembMarine) and target price of 10 cents even though he sees the company’s proposed acquisition with Keppel Offshore & Marine (Keppel O&M) succeeding.
The acquisition is pending the results from SembMarine’s extraordinary general meeting (EGM), which is expected to take place in January.
“Post-deal, we think an enlarged free-float market cap also raises the potential for index inclusions, which could drive positive share price momentum,” Osman writes. “We open a 90-day positive catalyst watch (CW) to reflect this.”
He adds that he is estimating SembMarine’s free float to be at around 60% following the deal. This implies a free-float market cap of around $5.8 billion at current share price levels.
As such, he is remaining “more cautious” about SembMarine’s fundamentals compared to its existing valuations.
Furthermore, the analyst deems near-term market expectations as “overly bullish”.
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“Even as the combined entity will have a substantial order book of [over] $18 billion, current valuations suggest that the market is pricing in an optimistic bull case recovery scenario for operational performance in the near term,” he writes.
In his report dated Jan 5, the analyst is forecasting SembMarine to write a net loss of $20 million for the FY2023 on a standalone basis.
“We expect [that] operational headwinds could persist near-term following management guidance for 2HFY2022 [with a] net loss of similar magnitude to 1HFY2022,” says Osman. His estimate also factors in the timing for SembMarine’s construction work for the P-82 FPSO order, which is likely to begin in the 2HFY2023.
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“Even if we were to use our bull case scenario patmi and net asset value (NAV) estimates, the combined entity would be valued at an unattractive 13x FY2023 P/E ratio and 1.7x P/NAV at SembMarine’s current share price levels,” he says.
Ahead of its proposed merger, the analyst thinks that the enlarged SembMarine and Keppel O&M entity may need an order win run rate of $5 million - $6 million to sustain operations profitably over the longer term.
“Management’s long-term strategy is to pivot the business toward green energy solutions alongside current demand for oil production assets (such as floating production storage and offloading vessels or FPSOs),” he writes
“While we see attractive market opportunities in offshore wind, SembMarine will have to build on its relatively nascent track record amid stiff industry competition,” he adds. “Further, we think several risk factors, including restructuring/yard integration costs post-combination, persistent supply chain/cost inflation issues, as well as customer concentration and order deferment risks (Petrobras orders account for [over] 80% of the order book) may not be discounted by the market.”
Shares in SembMarine closed 0.1 cent or 0.75% up at 13.5 cents on Jan 9.
