Singapore Yards - OCBC Investment 2016-01-29: Exploring possible scenarios

Singapore Yards - OCBC Investment 2016-01-29: Exploring possible scenarios Offshore & Marine SEMBCORP MARINE LTD S51.SI  SEMBCORP INDUSTRIES LTD U96.SI  KEPPEL CORPORATION LIMITED BN4.SI 

Singapore Yards: Exploring possible scenarios 

 Bracing for more to come 
 Considering the types of pre-emptive actions 
 Pros and cons for merger 

May not be the worst yet for companies 

  • From a high of US$115/bbl in Jun 2014, Brent crude has fallen by about 70% to about US$33/bbl now, and chances are it may stay low for longer. 
  • It also remains to be seen if oil prices have bottomed, and even if so, oil companies would want to see some sustainability before budgeting for new projects. 
  • Given the highly oversupplied rig market, things could get worse for Keppel Corp (KEP) and Sembcorp Marine (SMM) due to 
    1. potential provisions in jack-up rig orders in their order books, 
    2. potential provisions from Brazil, and 
    3. likely minimal new rig order flows for at least this year and next. 

Considering the pre-emptive actions to take 

  • It is hence not surprising that there are media reports saying that Temasek is discussing options for KEP and Sembcorp Industries (SCI), in which it has stakes of 21% and 49.5%, respectively. 
  • Given how KEP and SMM are global champions in their fields – and indeed Singapore wants to nurture globally competitive companies – we expect Temasek to lend its support to either companies should there be a need for more funds. 
  • We explore the various scenarios that may happen, as well as the likelihood of each. In our view, KEP and SCI are likely to divest their non-core assets or investments that have netted a good return, before cutting their dividends further, and before considering the possibility of raising capital. 

Merger talk may grow as downturn bites 

  • In the longer term, should oil prices stay low longer than expected, a merger of KEP’s O&M division and SMM is not inconceivable, even though there are arguments against it and could be a difficult process. 
  • Sometimes things happen not by choice, and we consider the pros and cons for such a development. 
  • Maintain HOLD and S$4.38 fair value estimate on KEP
  • For SMM, we have lowered our fair value to S$1.17 while maintaining SELL. 
  • Though this leads to a lower fair value for SCI to S$3.42, we maintain our BUY rating as the utilities portion remains undervalued. 

Low Pei Han OCBC Securities | http://www.ocbcresearch.com/ 2016-01-29
UOB Kay Hian Analyst Report BUY Maintain BUY 3.42 Down 3.88
SELL Maintain SELL 1.17 Down 1.79
HOLD Maintain HOLD 4.38 Same 4.38