Sembcorp Marine (SMM SP) - UOB Kay Hian 2016-11-17: Disposes Of 30% Stake In Associate CSG

Sembcorp Marine (SMM SP) - UOB Kay Hian 2016-11-17: Disposes Of 30% Stake In Associate CSG SEMBCORP MARINE LTD S51.SI

Sembcorp Marine (SMM SP) - Disposes Of 30% Stake In Associate CSG

  • Sembcorp Marine (SMM) announced the disposal of associate Cosco Shipyard Group (CSG) to COSCO for S$220.7m which resulted in a net gain of S$48.3m. The effects are mostly positive as core earnings in 2017-18 will improve on top of a reduction in net gearing. 
  • Our core earnings forecast for 2016 remains unchanged, but our 2017-18 forecasts have increased by 6%. 
  • Target price is revised up to S$1.26 as a result. Maintain HOLD. Entry price: S$1.24.


WHAT’S NEW


Disposes of 30% stake in Cosco Shipyard Group for S$220.7m. 

  • Sembcorp Marine (SMM) announced disposal of its 30% stake in associate Cosco Shipyard Group (CSG) for Rmb1,059.2m (S$220.7m) to China Ocean Shipping (Group) Company (COSCO). Net proceeds from the transaction, after capital gains tax and realisation of foreign currency translation reserves, represented a gain of S$48.3m. The carrying value in CSG was S$180.1m. Proceeds will be used for working capital.

Subject to relevant approvals by 31 Dec 16. 

  • The share purchase agreement (SPA) is conditioned on approvals from relevant Chinese regulatory authorities, internal approvals and issuance of a new Foreign-Investment Enterprise Certificate. If these are not fulfilled on or before 31 Dec 16, the SPA will be terminated.

Indirect interest of 2.5% in CSG post disposal. 

  • Post completion of the disposal, SMM will only have interest in CSG through its 4.98% shareholding in Cosco Corporation (Singapore), which has a 51% equity interest in CSG.


STOCK IMPACT


Earnings drag from CSG mostly removed. 

  • This transaction frees the group from the loss-making entity, which has proven to be a significant earnings drag. 
  • Recall that earnings in 3Q16 were deeply affected by this. Assuming completion, CSG will likely impact SMM for one more quarter (4Q16), after which it should minimally factor in SMM's future earnings.

Balance sheet improvements. 

  • Cash inflow is estimated to reduce SMM’s need for additional debt drawdown in 2017, improving its net gearing position. 
  • We estimate that net gearing will fall from 96%/91% in 2017/18 to 85%/80% respectively. Lower interest expense is expected as a result, which further improves future earnings.

Do not expect a special dividend. 

  • Given the need for liquidity in the challenging environment, we reckon SMM will preserve cash for its existing business. Chances of a special dividend from this are low to null in our view.


EARNINGS REVISION/RISK


No change to 2016 earnings forecast; 2017-18 earnings forecasts revised up by 6%. 

  • Our 2016 core earnings forecast of S$109.1m excludes one-off items, and is thus unaffected by the announcement. 
  • However, our 2017-18 earnings forecasts have risen to S$106.7m (+6%) and S$127m (+6%) respectively due to interest expense declining by 11-12% each year. Our assumptions on contract wins remain unchanged.


VALUATION/RECOMMENDATION


Maintain HOLD with a revised target price of S$1.26. 

  • The one-off boost to net profit (and hence shareholders’ equity) from the transaction lifts our target price from S$1.23 to S$1.26, benchmarked to 1-year forward P/B of 1.0x. 
  • Overall, the transaction provides additional liquidity to SMM and a one-off earnings boost. However, the continued weak contracting environment means that SMM's core business remains challenging. 
  • Balance sheet remains stretched but cash call risks are abating. 
  • Given the improving balance sheet but continued dismal earnings outlook, maintain HOLD. Entry price is S$1.24.




Foo Zhi Wei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-17
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.26 Up 1.230




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