SINGAPORE (Dec 4): UOB KayHian is maintaining its “buy” call on Sembcorp Marine with an unchanged target price of $2.10 on news of a potential sale of West Rigel rig.
“An improving rig market, especially for harsh environment semi-submersibles, will likely see SembMarine being able to divest the West Rigel at a favourable price,” says lead analyst Foo Zhi Wei in a Monday report.
This will improve its balance sheet profile, putting prior concerns of a stretched balance sheet to rest.
In addition, a growing pipeline of orders provides earnings and cashflow visibility for the yard, further allaying concerns of a declining orderbook.
According to rig brokers, sale of the West Rigel semisubmersible might be on the horizon, and at a price favourable to SembMarine.
Whatever the price, the key focus of the sale should be on the deleveraging of SembMarine’s balance sheet. Assuming that provisions are sufficient, this would see the rig transacted at no loss, which is UOB’s base case.
Under such a scenario, the cash inflow from such a transaction will UOB’s FY18 net gearing decline to 70% from 85%.
Share price will also likely see a re-rating as a result of the further balance sheet improvement, says Foo.
“Our earnings estimates remain unchanged, pending details of such a transaction materialising, adds the analyst, “Our target price remains unchanged at $2.10, pegged to 1.6 times FY19 book.”
Shares in SembMarine are up 3 cents at $1.90 or 35.8 times FY18 earnings.
