Sembcorp Marine - OCBC Investment 2016-01-29: Privatisation still has several unknowns

Sembcorp Marine - OCBC Investment 2016-01-29: Privatisation still has several unknowns SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine: Privatisation still has several unknowns 

 Still not compelling despite price fall 
 Supported by privatisation hopes 
 Several unknowns if offer were to take place 

What will a privatisation by SCI achieve? 

  • We believe this move only makes sense for SCI if the group believes in the long-term potential of SMM, and sees the current plunge in price as an opportunity. 
  • Still, this may not be well-received by SCI shareholders, at least for now. 
  • The fate of the seven Sete Brasil drillships is still hanging by a thread, and the offshore market lacks signs of a recovery. 
  • It may also be tough to persuade shareholders of SMM (who previously bought shares at a higher price) to bite, given how much the share price has fallen. 
  • Finally, SCI itself requires funds to support its growing overseas utilities business (China, India, Bangladesh, Myanmar), where it sees the most promise thus far. 

Privatisation at what price? 

  • Though SCI did try to privatize SMM in 2002, we note that circumstances then and now are rather different. SMM then had a strong financial position, and was in a net cash position. 
  • The outlook for the rig building sector was also looking brighter and more promising. 
  • At S$1.48, SMM is now trading at 1.0x book, below the 1.6x book level at which SCI tried to privatise SMM then. 
  • There is also concern that potential provisions may erode the book value further in following quarters. 

An offer for SMM? Timing and offer price are unknowns 

  • With the continued fall in oil prices and corresponding fall in valuations among oil and gas stocks, we lower our P/B for SMM from 1.15x to 0.75x FY16 book, as the chances of provisions on its order book increase. 
  • This leads to a drop in our fair value estimate from S$1.79 to S$1.17. 
  • Though there are hopes that a buy-out of SMM may take place (indeed the price of SMM has been rather supported ever since media reports of a potential privatisation), we are unsure of the timing and pricing should an offer surface. 
  • Maintain SELL. 
  • SMM will announce its FY15 results on 15 Feb 2016, and a net loss is expected for 4Q15.

Low Pei Han OCBC Securities | http://www.ocbcresearch.com/ 2016-01-29
OCBC Securities SGX Stock Analyst Report SELL Maintain SELL 1.17 Down 1.79