Sembcorp Marine - OCBC Investment 2018-01-03: Upgrade To HOLD

Sembcorp Marine - OCBC Investment 2018-01-03: Upgrade To HOLD SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Upgrade To HOLD

  • To sell West Rigel rig.
  • Share Price correction post Keppel Corp fine.
  • Upgrade to HOLD.



Share price divergence between Keppel Corp and Sembcorp Marine 

  • Following Keppel Corp’s (KEP) announcement last Saturday that its O&M unit will pay fines totalling US$422m (S$570m), Sembcorp Marine’s share price corrected 5% from S$1.94 on 22 Dec to S$1.85 on 29 Dec before benefitting from strong oil prices on 2 Jan to close at S$1.87. Keppel Corp’s share price fell from S$7.34 on 22 Dec to S$7.29 on 26 Dec but recovered subsequently to close even higher at S$7.53 yesterday. 
  • The divergence in share price performance is likely due to Sembcorp Marine’s O&M pure play status and relatively smaller asset base compared to Keppel Corp. The market may be wondering if Sembcorp Marine will face a similar penalty, and if so, the fine will comprise a larger percentage of Sembcorp Marine’s net asset value.

To sell West Rigel for US$500m 

  • Sembcorp Marine also announced on 26 Dec that it has inked an agreement to sell the semi-submersible rig West Rigel to a buyer at a price of US$500m.
  • Compared to the US$568m price tag that was agreed on with the original owner, Seadrill’s North Atlantic Drilling, this is only 12% lower, illustrating the relative resilience in prices for quality assets built by yards like Sembcorp Marine. Meanwhile, a ~S$24m loss will be booked by Sembcorp Marine if the above sale materializes.


Upgrade to HOLD 

  • For Keppel Corp, the financial penalty is an extraordinary item and its impact is one-off. We estimate that the fine of S$570m accounts for about 4.5% of Keppel Corp’s 3Q17 net asset value. We are in no position to comment on whether Sembcorp Marine will be impacted, but based on a back-of-the-envelope calculation, S$570m would represent about 22.6% of Sembcorp Marine’s 3Q17 net asset value.
  • Similar to Keppel Corp, should there be any fine, we do not expect any operational impact. 
  • Meanwhile, oil prices have remained at relatively healthy levels, and posted their strongest opening to a year since 2014 yesterday; consensus for Brent (according to Bloomberg) is looking at US$65/bbl for 2018. 
  • We tweak our P/B multiple slightly from 1.8x to 1.85x and our fair value estimate rises from S$1.74 to S$1.78. With the less than 5% downside to our FV, we upgrade our rating on Sembcorp Marine to HOLD.




Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2018-01-03
OCBC Investment SGX Stock Analyst Report HOLD Upgrade SELL 1.780 Up 1.740



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