Sembcorp Marine - UOB Kay Hian 2022-06-22: New Order Win Continues Its Positive Momentum

SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - New Order Win Continues Its Positive Momentum

While Sembcorp Marine’s new order win worth S$200m from the Brazilian Navy was largely expected, this nevertheless underscores the company’s continuing positive momentum and we expect more conventional and renewables orders in the near to medium term.

Sembcorp Marine’s robust rate of deliveries in 1Q22 has led to material balance sheet improvement with its net debt/equity declining to 0.38x at end-1Q22 from 0.49x at end-4Q21. Maintain BUY.

Sembcorp Marine (SGX:S51) recently won a S$200m engineering, procurement and construction (EPC) contract from the Brazilian Navy for a newbuild ice-capable support vessel for deployment in the Antarctic. The project will be executed at Sembcorp Marine’s Estaleiro Jurong Aracruz yard in Brazil to comply with local-content requirements, however some other work such as specialised shipbuilding design will be carried out in Singapore.
Sembcorp Marine disclosed that construction of the vessel will commence in 2022 with completion in 3Q25. Sembcorp Marine had earlier indicated that it was reasonably confident about this order win at its 1Q22 business update in mid-May 22, and this success reaffirms our view that the company will continue to garner further order wins as the year progresses.
Executing well on its current orderbook. Out of the 17 projects that it is currently working on, Sembcorp Marine is slated to deliver 12 of these in 2022; however, with six of these already delivered to its clients, we should expect better operating cash flow and a meaningful narrowing of losses vs 1H21. Indeed in its announcement, Sembcorp Marine guided for 1H22 results to be "significantly better" y-o-y.
Sembcorp Marine highlighted that as at end-1Q22, its net debt/equity had improved to 0.38x compared with 0.49x in end-21.

At its 1Q22 business update, Sembcorp Marine disclosed that it had won various repairs and upgrades contracts, including three vessels for the US Navy as well as nine containerships from Maersk.
As at end-1Q22, Sembcorp Marine had a net orderbook of S$1.75b (which includes repairs and upgrades contracts) consisting of S$1.51b of projects under execution and S$0.24b of ongoing repairs and upgrades projects. Including the Brazilian Navy order win, this would result in a net orderbook of S$1.95b.

In our view, the upcoming merger with Keppel Offshore Marine (KOM), if successful, will create a pure-play company with the depth issues in the future.

We highlight that the proposed merger in its current form is locked in, for example the 44:56 equity value exchange ratio and the use of a discounted cashflow methodology in determining the enterprise value ratio. Should the merger fail to win shareholder approval, Sembcorp Marine and KOM could resume talks to alter some or all of the terms; however, we estimate that this would take at least another 6-12 months to complete.

Maintain BUY spending in both conventional offshore energy and renewables.
- In our view, the offshore construction cycle for both conventional oil and gas and renewables has room for growth in the next few years, especially given the lack of spending by the global oil and gas industry, thus constraining energy supply.
- In addition, the war in Ukraine appears to have led to a re-focus by majors such as BP, Eni, Equinor, Shell, ExxonMobil and Equinor towards further investment in offshore Africa.
- On the offshore wind sector, Europe continues to add capacity and is projected by Rystad to add 4.2GW in capacity in 2022 and then almost doubling again in 2023 to 7.3GW.
See
Catalysts: New orders for rigs, offshore renewable installations or fabrication works as well as repairs and upgrades work for cruise ships and other commercial vessels.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-06-22

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