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

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.

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.

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