Sembcorp Marine - DBS Research 2018-01-22: Best Proxy To O&M Recovery

Sembcorp Marine - DBS Vickers 2018-01-22: Best Proxy To O&M Recovery SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Best Proxy To O&M Recovery

  • Robust contract wins to drive rerating.
  • Merger more likely than privatisation.
  • Unlocking value from Admiralty Yard redevelopment? It could add S$1 to Sembcorp Marine’s target price.
  • Reiterate BUY; Target Price raised to S$3.10.



Maintain BUY; Target Price raised to S$3.10

  • Maintain BUY; Target Price raised to S$3.10, based on higher 2.4x FY17 P/BV multiple (0.5SD below mean). We believe re-rating on Sembcorp Marine (SMM) will continue to be driven by:
    1. SMM is a pure play to ride the oil price recovery;
    2. Strong order pipeline for non-drilling solutions;
    3. the reactivation of Sete’s projects; and
    4. SMM as a potential M&A play arising from a consolidation of Singapore yards. 
  • Our back of envelopment calculation estimates that the redevelopment potential of Admiralty Yard could add $0.64-S$1/share to Sembcorp Marine’s fair value, if it happens.


Where we differ: more bullish on SMM’s contract wins. 

  • Order wins, a critical leading indicator for earnings recovery, is set to rise in the next 12 months. We believe Sembcorp Marine’s strong order pipeline would translate to S$3bn in new orders in 2018, which could potentially include
    1. two large Compressed Gas Liquid carriers for SeaOne Caribbean valued at S$800m in total;
    2. a semi-submersible production unit for Shell’s Vito at S$400-800m; 
    3. a Gravifloat (SMM’s proprietary technology) modularised LNG exporting terminal for Poly-GCL at c.S$1bn; and
    4. FPSO topside for Statoil worth S$200-400m.


Reactivation of Sete Brasil rig orders. 

  • The landmark deal to sell all nine terminated jackup rigs to Borr Drilling and disposal of harsh environment semisubmersible rig West Rigel has eliminated the key overhanging concerns on Sembcorp Marine. The restructuring of customer Sete Brasil is also seemingly closer to a resolution, pending approval of the revised restructuring proposal submitted at end-Aug 2017. 
  • We believe Singapore rigbuilders are well positioned to deliver at least four rigs each (which are in the advance stages of construction) out of Sete Brasil’s existing 13 orders (c.S$1bn each). The reactivation of rig construction will be another re-rating catalyst.


Valuation

  • Our target price of S$ 3.10 is based on 2.4x FY18 P/BV, pegged to 0.5SD below its mean valuation since 2004. 
  • Sembcorp Marine’s book value has already been written down after the massive S$609m provisions taken in FY15.


Key Risks to Our View

  • Key downside risks are sustained low oil prices which would affect rig count and new-building activities, execution risks in new product types, and disposal of jackup rigs at a loss. 
  • Upside risk could come from privatisation or M&A activities, as well as the write-back of provisions from successful deliveries or vessel sales.



WHAT’S NEW - SPINNING M&A STORIES


Sembcorp Marine sees strong order win momentum. 

  • Sembcorp Marine (SMM) has a strong order pipeline worth over S$3bn, potentially translating to firm orders over the next 12 months, including: 
    1. LOIs signed with SeaOne Caribbean for two large Compressed Gas Liquid carriers, totalling S$800m; 
    2. Preferred bidder to build a semi-submersible production unit, estimated to cost S$400-800m, for Shell’s Vito project; 
    3. finalisation of its long-awaited first Gravifloat modularised LNG exporting terminal for Poly-GCL at c.S$1bn; and 
    4. FPSO processing topside for Statoil’s Johan Castberg project valued at S$200-400m.
  • In addition, there could be other FPSO conversion projects and LNG importing terminals at a price tag of S$150-300m each.
  • We believe SMM’s Gravifloat LNG terminal provides a unique cost efficient modular option to customers, and stands to be the next mainstream product of SMM. The value of these units can range from S$200-$300m for importing LNG terminals, and up to c.S$1bn for exporting LNG terminals.


SCI privatising SMM? 



SMM - redevelopment potential for its 87 hectare Admiralty Yard? 

  • The potential of Sembcorp Marine (SMM) redeveloping its seafront Admiralty Yard into a waterfront township has resurfaced.
  • Encompassing nearly 87 hectares or 870k square metres, the Admiralty Yard’s lease is due in 2028. The redevelopment option was tabled for consideration when Admiralty Shipyard (previously known as Sembawang Shipyard) / JSL merger was initiated 20 years ago in 1997.
  • For this to happen, SMM will have to apply for rezoning of the shipyard and top up the land value. Based on our back-of-the-envelope calculation, the redevelopment can potentially raise SMM’s fair value by S$1.03 per share.

Admiralty Shipyard – redevelopment into a sea-front facing new town. 

  • Sembawang New Town over the past two decades undergone a huge transformation and now is vibrant housing estate. Starting out as mainly public housing units, as a growing town, Sembawang continue to develop with more amenities and transport infrastructure and in recent years, saw the development of new private housing projects (namely Canberra Residences, The Nautical and Skypark Residences (Executive Condominiums). 
  • With limited private residential option in Sembawang area, we believe that the waterfront facing SMM’s Admiralty Shipyard (previously known as Sembawang Shipyard) along Admiralty Road East provides SMM with the potential to extract value from the current use as a shipyard.
  • Timing of this redevelopment is app, especially when the group is looking to relocate all its Singapore shipyards into an integrated mega-yard in 2024 in Tuas, thus the timing is also ripe for the group to reconsider alternative uses for the shipyard at Sembawang.

At what cost? 

  • Admiralty Shipyard sits on 860,715 sqm of prime sea-fronting land. Assuming that approvals for a non-landed residential housing zoning at a gross plot ratio (GPR) of 1.4x, potentially sellable gross floor area (GFA) could top 1.2m sqm (or 13m sqft). This will imply significant capital commitment that SMM will have to commit to develop the project. 
  • Moreover, we note that SMM lacks the expertise as a property developer, which makes executing on this redevelopment uncertain at this moment.
  • The rising land prices in Singapore amidst developers’ thirst for land have resulted in government revising up the development charge (DC) rates across the island. 
  • Subject to SMM getting approval to convert the existing Admiralty Shipyard into a new residential project, we estimate that total differential premium (DP) payable will be hefty at close to S$2.4bn (100% basis), implying a land price of S$278psf, a number that is fairly low in today’s context. This DP accounts for both
    1. conversion of the industrial land into residential zoning and
    2. topping up the land tenure back to 99 leasehold.
  • Our back-of-the-envelope calculation shows that total capital commitment is close to S$10bn (S$778 psf) which is significant.
  • Given SMM’s gearing is at 1.1x, we see limited capacity to gear up further to develop the site. Therefore, we believe that a more conservative approach in redeveloping the site in phases could be an appropriate strategy, if it happens.
  • Assuming that SMM is able to complete selling the project at S$1,100 psf, the total potential profit (after tax) for this development could top S$3.5bn or an impact of close to S$1.66/share. Given the uncertainty of execution and time needed to complete this project, the present value of this development could be closer to S$0.64-S$1.03/share (assuming a 5 years – 10 years development period).




Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2018-01-22
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.10 Up 2.300



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