SINGAPORE (June 4): RHB Research is calling a “buy” on Sembcorp Marine given it is the only listed offshore & marine pure play that may soon experience a pickup in activities.
RHB expects SembMarine earnings base to increase significantly over 2019-2020, driven by savings in depreciation costs post-yard consolidation, and a pickup in orderbook replenishment.
“We value the stock at $1.99, based on 1.8 times FY20F book value, 1SD above its 5-year mean, on sector recovery,” says RHB.
RHB expects orderbook replenishment to increase to $2.5-3.7 billion on improving upstream activities globally. Besides FPSO conversion jobs, projects which have been sanctioned surged, starting this year, and largely in countries like Brazil and Africa.
“We expect LNG ship repair jobs to remain aplenty, with 41 LNG ships expected to be repaired and upgraded in 2019, according to lngworldshipping.com,” says RHB.
In fact, repair and upgrade typically fetch higher EBIT margins of 9-10% margins compared to fabrication jobs, which fetch EBIT margins of 2-4%.
RHB also sees limited downside from unit Sete Brasil which has taken $329 million worth of provisions to account for the drillship contracts after the Brazilian corruption scandal broke in 2015.
“We believe that the provisions are sufficient based on current circumstances,” says the house.
Of the seven drill ships contracted, four have seen material work progress before the client stopped paying. In the event of any potential sale of the drill ships, writebacks of provisions would be a positive for the group, it adds.
SembMarine’s yard consolidation is also set to reap benefits. It has two yards to be returned to the Singapore Government, with the bulk of operations to be directed to the integrated Tuas Boulevard Yard (TBY) and the group’s corporate headquarters is expected to move there by 1H19.
“While the group could be hit with $60 million worth of accelerated depreciation for 15 months starting 4Q19, it will realise cost savings of $48 million yearly starting FY20,” says RHB.
Looking ahead, the group is gunning for more higher-end LNG jobs. It has gone on an acquisition spree for intellectual properties pertaining to LNG-related technologies, including the US$39 million ($53.4 million) acquisition of Sevan Marine last Sept.
“Any future announcements of major LNG contracts could potentially result in positive adjustments to our base- case earnings,” says RHB.
As at 10.28am, shares in SembMarine are trading at $1.40 or 47 times FY20F earnings.
