Sembcorp Marine - CIMB Research 2016-08-24: Long awaited full control, at a price

Sembcorp Marine - CIMB Research 2016-08-24:  Long awaited full control, at a price SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Long awaited full control, at a price

  • We deem SMM’s acquisition of the remaining 15% stake in PPL Shipyard at US$115.06m (1.01x P/BV) as expensive.
  • Given the dire order outlook and potential for cancellations from existing order book, having full control of PPL Shipyard may not bring in incremental investment merits.
  • Maintain Reduce and target price of S$0.90, still based on 0.7x P/BV.

Full control of PPL shipyard, finally

  • SMM is increasing its stake in PPL Shipyard from 85% to 100%, at a cost of US$115.06m or 1.01x of PPL Shipyard’s s net tangible assets (US$113.153m) as at end-Jun 16.
  • SMM bought 50% of PPL Shipyard in 2001 for c.US$9m and another 35% for c.US$8m in 2003. PPL Shipyard became the crown jewel of SMM during the rigbuilding boom, producing proprietary designed rigs including the Baker Marine and Pacific Class series. It generated cumulative profits of S$1.6bn (c US$1.2bn) in 2001- 15 and SMM has received S$540m (c.US$400m) cash dividend since its investment.
  • The remaining 15% was originally owned by BakerTech Holdings via PPL Holdings and E-Interface. In 2010, BakerTech sold the entire interest for US$116.25m to QD Asia Pacific (45%-owned by Yangzijiang Shipbuilding and 55%-owned by Qatari Diar Real Estate Investment Company).
  • The transaction sparked a legal suit between PPL Holdings and SMM on the latter’s first right of refusal for the 15% as well as board representation in PPL Shipyard. The sale went through but the control of the board remained with SMM.

Tough times ahead

  • We do not expect any new jack-up order wins to come through anytime soon, and expect PPL Shipyard to report a loss in 2016 with one jack-up on hand to be completed for Japanese BOT Leasing/Japan Drilling. PPL Shipyard reported a net loss of US$4.48m in FY15.
  • In the near-term, PPL Shipyard faces the risk of holding on to a portfolio of undelivered rigs – three for Oreo Negro, two for Perisai Petroleum, one for Marco Polo and three speculative-built units.
  • In the event of any sale of the above units to new owners, having 100% control will allow SMM to have full discretion over the selling price and pocket the gain (if any).
  • This is the only possible positive in our view.

Positive for the seller

  • The winner of the transaction would be QD Asia Pacific which has received decent dividends from PPL Shipyard with an IRR of c.8.5%, in addition to getting back its original investment cost. Yangzijiang will use the proceeds to fund its working capital.

Maintain Reduce

  • The acquisition will be partially funded by debt, which we see as a stretch to its 1x net gearing.
  • We maintain our EPS and target price, which is still based on 0.7x P/BV in line with declining ROE. 
  • De-rating catalysts could come from more cancellations while an oil price surge could be a re-rating catalyst.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-08-24
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.900 Same 0.900