Sembcorp Marine - CIMB Research 2016-09-01: Removed from STI

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Removed from STI

SMM is being excluded from Straits Times Index in the September quarterly review, with effect from 19 Sep 16.
This could be a reflection of its poor performance relative to the index since 2015.

We expect slight pressure on its share price in the short term, but portfolio rebalancing impact is minimal as most funds are benchmarked to MSCI indices.

In FTSE Russell’s latest quarterly review, SMM (c.0.5% weightage) has been excluded from the STI. Jardine Matheson Holdings (JM) will be added.
JM was removed in 2008 during the revamp of STI to reduce the number of constituents from 50 to 30. The reserve list includes five highest ranking non-constituents of STI by market cap - Mapletree Commercial Trust, Suntec REIT, Keppel REIT, Mapletree Industrial Trust and Singapore Post.
The next review will be on 1 Dec.

STI is usually used only by single-country funds. Most international funds are benchmarked to MSCI indices with mandates that span across regional groups.
There could be some pressure on SMM’s share price but price movements from portfolio-rebalancing could be minor.

Order momentum has been weak with orders worth S$320m won YTD, including variation orders. Near-term de-rating catalysts include impairment of inventory for jack-up rigs that are likely to be cancelled by customers with credit risks such as Malaysian Perisai Teknologi (two jack-ups) and Mexican Oro Negro (three jack-ups).
Although profits from these rigs were reversed in 2015, we see risks of inventory impairment if SMM is unable to find buyers for these undelivered rigs. We estimate a going rate of c.US$150m for jack-up rigs, which is a c.30% discount to the contract price of c.US$211m.
Maintain Reduce and target price of S$0.90, still based on 0.7x P/BV.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-09-01

CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.900 Same 0.900