News analysis

Whither Sembcorp Marine?

Stock's resilience despite dismal results leads to talk that rig-builder may be privatised

The downturn in the oil industry has belted Sembcorp Marine's bottom line, yet its share price is proving surprisingly resilient.

The counter rallied yesterday, for the third consecutive day, to close 4.9 per cent up at $1.70, with investors intrigued by talk that SembMarine could be taken private by parent company Sembcorp Industries or Temasek Holdings.

Its shares have been so buoyant the firm drew a trading query from the Singapore Exchange on Wednesday.

2015: A POOR SHOWING

Traders seem to be buying into hopes that SembMarine will be bailed out of a deteriorating market.

When the rig-building giant announced its results on Monday, the magnitude of its losses and provisions surprised analysts. The company has gone from a full-year net profit of $560.1 million in 2014 to a loss of $289.7 million in the 12 months to Dec 31. It was the first annual loss in at least 12 years.

The red ink included a hefty $609 million for impairment and provisions of rig contracts as well as a $192 million loss from its investment in Cosco Shipyard Group. More than half of the provisions - $329 million - were for orders from Brazilian client Sete Brasil, which stopped making payments in November 2014 as it fell into financial distress. That, coupled with delivery deferments and a contract termination, sent SembMarine from the net-cash position it has enjoyed since 1988 into a net-debt one.

SembMarine may have come off worse compared with its bigger rival Keppel Corporation as it has also had to make write-downs for other clients, aside from Sete Brasil.

RHB Research Institute analyst Lee Yue Jer said Keppel Offshore & Marine (Keppel O&M) customers look to be in stronger financial positions relative to those of SembMarine. "Look at the share prices of Transocean (for Keppel O&M) versus Seadrill (for SembMarine). It can be quite telling of what the market thinks about (their) balance sheets," he noted. The New York-listed stocks have plunged in the past year: Transocean by 47.6 per cent and Seadrill by 85.4 per cent.

RIPE TARGET FOR PRIVATISATION?

Maybank Kim Eng analyst Yeak Chee Keong noted last month that SembMarine is arguably staring at the "greatest set of challenges in its history" - a toxic combination of limp rig demand, rig oversupply, order cancellations and payment risks, uncertainties in Brazil and enlarged capacity at its Tuas yard.

So it may "make sense" for Sembcorp Industries to privatise SembMarine and use its balance sheet to support the company's working capital needs until the industry turns around, he said.

A bigger possibility would come from Temasek, said KGI Fraser Securities analyst Joel Ng. "SembMarine is trading at its 20-year trough valuations and a privatisation angle would make sense in the long term, especially given the strategic importance of the two major offshore and marine yards to Singapore's role as a leading global marine hub," he noted.

The question is, are the two "candidates" up for this?

THE POTENTIAL WHITE KNIGHTS

Sembcorp Industries group president and chief executive Tang Kin Fei said at the group's results briefing on Wednesday: "Whatever decision we make, it has to be accretive to... shareholders." He has singled out prospects within its utilities business, which delivered a 72 per cent growth in net profit for the full year to $701.5 million, over the losses in the marine business.

As for Temasek, which declined to comment, taking SembMarine private at a time when volatility has roiled financial markets worldwide may not be a choice option.

Temasek's energy and resources strategy, which has fallen from a portfolio weighting of 6 per cent in 2014 and 2013 to 5 per cent as at last March, appears to be shifting more towards gas as well, instead of oil.

And the argument that keeping SembMarine as an independent listed firm helps maintain a strong "Singapore Inc" does not hold up well anymore, looking at how Temasek was quite willing to sell its entire 67 per cent stake in Neptune Orient Lines to a French company at a discount price of $2.3 billion.

Meanwhile, CIMB Research analyst Lim Siew Khee does not believe SembMarine will be privatised, saying "an equity recapitalisation is more likely".

Still, as uncertainty continues to cloud the industry, speculators will have a field day running up - or down - SembMarine share prices.

A version of this article appeared in the print edition of The Straits Times on February 19, 2016, with the headline 'Whither Sembcorp Marine?'. Print Edition | Subscribe