Sembcorp Marine (SMM SP) - UOB Kay Hian 2017-12-04: Potential Sale Of West Rigel On The Horizon

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SEMBCORP MARINE LTD S51.SI

Sembcorp Marine (SMM SP) - Potential Sale Of West Rigel On The Horizon

• According to rig brokers, sale of the West Rigel semisubmersible might be on the horizon, at a price favourable to Sembcorp Marine (SMM). The market will likely focus on continued deleveraging of SMM’s balance sheet. 
• Our base case sees SMM’s 2018 net gearing declining further from 85% to ~70%. A re-rating of share price might occur as a result. Earnings estimates remain unchanged pending details of a deal materialising.
• Maintain BUY with an unchanged target price of S$2.10.

WHAT’S NEW

• Sale of West Rigel on the horizon. According to rig brokers, sale of the West Rigel semisubmersible might be on the horizon, and at a price favourable to Sembcorp Marine (SMM).

STOCK IMPACT

Balance sheet deleveraging will be the key focus. 

• Whatever the price, the key focus of such an event will be the deleveraging of SMM’s balance sheet. 
• Assuming that provisions are sufficient, this would see the rig transacted at no loss, which is our base case. Under such a scenario, the cash inflow from such a transaction will see our 2018 net gearing decline from 85% to ~70%. 
• Sembcorp Marine's share price will likely see a re-rating as a result of the further balance sheet improvement.

EARNINGS REVISION

• No change to estimates for now. Our earnings estimates remain unchanged, pending details of such a transaction materialising.

VALUATION/RECOMMENDATION

Maintain BUY with an unchanged target price of S$2.10. 

• Our target price remains unchanged at S$2.10, pegged to 1.6x 2019F P/B. 
• An improving rig market, especially for harsh environment semi-submersibles, will likely see SMM being able to divest the West Rigel at a favourable price. This will see its balance sheet profile improve, putting prior concerns of a stretched balance sheet to rest. 
• A growing pipeline of orders provides earnings/cash flow visibility for the yard, further allaying concerns of a declining orderbook. 
• The improving prospects will likely drive the continued re-rating of the stock. 
• Maintain BUY.

Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-12-04

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.100 Same 2.100