SEMBCORP INDUSTRIES LTD (SGX:U96)
SEMBCORP MARINE LTD (SGX:S51)
Sembcorp Group - Back To Fundamentals
- Recent Sembcorp Industries share price & Sembcorp Marine share price rebound appears to be speculative.
- Potential restructuring is unclear and could take time.
- Order wins remains the critical factor, but recovery has been slower than expected.
- Downgrade Sembcorp Marine to HOLD with Target Price cut to S$1.45.
Jumping the gun on yard merger speculation?
- The share prices of SEMBCORP MARINE (SGX:S51) and parent SEMBCORP INDUSTRIES (SGX:U96) have rallied 17% / 10% over the past four days as Temasek’s pre-conditional partial offer to gain majority control of KEPPEL CORPORATION (SGX:BN4) has fueled speculation of restructuring among these three names. (See Sembcorp Industries Share Price; Sembcorp Marine Share Price.)
- We opine that it is premature to identify a beneficiary at this juncture, given the various probable permutations on how the potential merger could be done, pricing, ownership etc. In addition, such a proposal will take time as a strategic review on Keppel Corp will only be carried out after Temasek obtains its desired 51% stake in Keppel Corp, which could take at least another 6-12 months. (See previous report: Shipbuilding: Merger on the cards?)
Order wins remains the key.
- Meanwhile, order win momentum remains the critical factor for Sembcorp Marine. Its orderbook (ex-Sete) has dwindled to an alarmingly low level of S$2.1bn, which implies < 1-year revenue coverage as at end Jun-2019. Order wins have been sluggish.
- In 3Q19, Sembcorp Marine secured new contract wins worth S$400m, bringing YTD wins to S$575m, a far cry from the breakeven revenue level of S$2.5bn a year and market expectations of S$3-4bn new orders at the start of the year.
- While enquiry levels have been rising, competition remains keen. It is worrisome that more asset owners have expressed plans to construct offshore platforms in China, capitalising on the availability of funding.
Re-rating hinges on order recovery.
- Given the lackluster order wins thus far and jittery macro outlook, we are lowering our target P/B multiple for Sembcorp Marine to 1.3x (1.3SDbelow mean), from ~1.8x previously. As such, our Target Price for Sembcorp Marine is cut to S$1.45.
- Accordingly, Sembcorp Industries’s Target Price is also adjusted lower to S$2.90, reflecting the change in Sembcorp Marine's target price. (See Sembcorp Target Prices; Sembcorp Marine Target Prices.)
- Downgrade Sembcorp Marine to HOLD as we await more evidence of contract wins in particular for its Gravifloat gas solutions, and better clarity on any potential yard merger.
Pei Hwa HO
DBS Group Research
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https://www.dbsvickers.com/
2019-10-25
SGX Stock
Analyst Report
2.90
DOWN
3.200
1.45
DOWN
1.900
