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.

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.

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.

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.

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

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