Bullish outlook for Sembmarine amid rising energy demand

The report comes just days after Sembmarine announced that its cash flow and liquidity management have improved. PHOTO: SEMBCORP INDUSTRIES LTD

SINGAPORE - Sembcorp Marine's business outlook is bullish given the strong industry tailwinds due to rising demand for both conventional energy and renewables, UOB Kay Hian said.

A report from the investment house out yesterday cited these and the company's relatively stronger financial footing for maintaining a "buy" call on the stock with a price target of 15.6 cents.

This is a 60 per cent upside from its closing price of 9.6 cents yesterday.

The report comes just days after Sembmarine announced that its cash flow and liquidity management have improved, following the deliveries of several projects during the first quarter of this financial year. As a result, the net debt/equity ratio has improved to 0.38 times as at March 31, from 0.49 times as at Dec 31, the end of the last financial year.

The company's update noted that it expects to have the liquidity to fund operations "for the foreseeable future", adding that the balance of net proceeds from a $1.5 billion rights issue in 2021 stood at about $720 million.

Sembmarine had a net order book of $1.75 billion as at March 31, comprising $1.51 billion of projects under execution and $240 million of ongoing repairs and upgrade projects. Renewables and cleaner/green solutions comprise approximately 65 per cent of its net order book.

Two weeks ago, the company announced plans to merge with Keppel's Offshore and Marine (O&M) business, Keppel O&M, to form what could become one of the world's biggest offshore energy exploration services player.

Under the agreement, Keppel will receive $500 million from Keppel O&M and a 56 per cent share of the new company on a post-issue basis. Keppel will distribute 46 per cent of the combined entity's shares in-specie to its shareholders and retain a 10 per cent stake.

Sembmarine will control 44 per cent of the new company. Shareholders will exchange their shares in Sembmarine for stock in the combined entity on a one-for-one basis, which will then replace Sembmarine on the mainboard.

"With the Sembmarine/Keppel merger terms largely in place and the uncertainty out of the way, the focus on Sembmarine will be to garner new orders in 2022 and add to its orderbook," noted UOB Kay Hian analyst Adrian Loh.

"Our target book-value multiple for Sembmarine of 1.2 times reflects our confidence that it will garner such orders, which will lead to positive share price performance."

He added that the offshore construction cycle for both conventional oil and gas and renewables has room for growth in the next few years, especially since the lack of spending by the global oil and gas industry will constrain energy supply.

"In addition, the war in Ukraine appears to have led to a refocus by majors such as BP, Eni, Shell, ExxonMobil and Equinor towards further investment in offshore Africa.

"For the offshore wind sector, Europe continues to add capacity and is projected by Rystad to add 4.2GW (gigawatts) in capacity in 2022 and then almost double again in 2023 to 7.3GW."

The report noted that Sembmarine is slated to deliver 12 of the 17 projects that it is working on in 2022.

It added that it expected better operating cash flow and a meaningful narrowing of losses versus the first half of last year.

The UOB Kay Hian report cited the Sembmarine update and noted: "In our view, the tone of the comments is the most positive that we have seen from management in the past three years."

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