Shipyard - DBS Research 2016-08-24: SMM takes full control of PPL Shipyard

SEMBCORP MARINE LTD S51.SI

Shipyard - SMM takes full control of PPL Shipyard

Sembcorp Marine (SMM) has entered into a sale and purchase agreement with PPL Holdings Pte Ltd (PPLH) and E-Interface Holdings Ltd (E-Interface) to acquire the remaining 15% stake in its PPL Shipyard Pte Ltd (PPLS) for US$115.1m cash, at an implied valuation of 1x P/BV.
PPLH, formerly a wholly-owned subsidiary of Baker Technology Ltd. (Baker Tech), was acquired by Yangzijiang (YZJ, 45% stake), Q-D Asia Pacific part of a Qatari sovereign wealth fund (50.1% stake) and Mr Yu Kebing (4.9% stake) in 2010. It owns a 15% stake in PPLS.
PPLS is SMM’s main facility for jackup rig construction.
To date, PPLS has built a total of 63 jack-up rigs (including 27 units of PPL Pacific Class 375 design, and 11 units of Pacific Class 400 design), six Semisubmersibles and four Swamp barges.

We believe this is a win-win transaction. Though, it is immaterial to both SMM and YZJ, with the transaction value representing approximately 5.6% and 2.3% (adjusted for YZJ’s effective interests in PPLH) of SMM and YZJ’s market capitalisation respectively.
From SMM’s standpoint, management had expressed interest to acquire the remaining 15% stake in PPLS from Baker Tech and attempted to block Baker Tech’s disposal of PPLH to YZJ & partners six years ago. Having full control of PPLS allows better flexibility in terms of yard management. In addition, for argument's sake, it should also simplify the approval process for any future M&A or consolidation activities involving PPLS.
From YZJ’s perspective, it makes perfect sense for them to divest PPLS as they had decided to shy away from the offshore sector 2-3 years back. As such, the key rationale for the PPLS investment – to shorten its learning curve in the offshore space – no longer holds. Furthermore, the consideration is almost on par with their acquisition cost in 2010, and carrying value on book, which is rather compelling in this environment.

Reiterate BUY on YZJ. The stock offers a decent dividend yield of 4%, and valuation is undemanding at 0.7x P/BV despite its 7-8% ROE. Our SOTP-based TP of S$1.00 translates to 0.9x FY16 P/BV.
Maintain FULLY VALUED rating on SMM with TP of S$1.20, based on 1.0x FY16 P/BV.

Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-08-24

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