UOB Kay Hian upgrades SembMarine to 'buy' on rights issue hopes

UOB Kay Hian believes much of the negatives surrounding SembMarine have been priced in at current levels. PHOTO: SEMBCORP MARINE

SINGAPORE (THE BUSINESS TIMES) - UOB Kay Hian has upgraded Sembcorp Marine (SembMarine) to a "buy" as the brokerage firm believes the group's $1.5 billion rights issue should enable it to better weather market conditions over the next 12-18 months, and hopefully garner new order flows.

The move comes despite a lower price target of 11 cents per share compared with 12.4 cents previously, after factoring in a 0.74 times earnings target multiple for next year and assuming a successful rights issue of $1.5 billion.

In a report on Monday (Sept 6), analyst Adrian Loh said he believes much of the negatives surrounding SembMarine have been priced in at current levels.

He thinks the new price target's 30 per cent discount to SembMarine's past five-year average price-to-book value of 1.07 times is a "reasonable reflection" of the industry risks faced by the company in the next 12 months at the least.

Existing shareholders of the stock should subscribe to the rights issue at the rights' last closing price of 0.2 cents last Friday, in his view.

A successful rights issue, which SembMarine targets to complete by the third quarter of this year, is estimated to result in a 2022 book value per share of 14 cents.

"However, we caution that investors (buying into the rights issue) may have to exercise a considerable amount of patience given the uncertainty around the timing of an upturn in the offshore renewables and marine industry," said the analyst.

While UOB Kay Hian has left its earnings estimates for this year unchanged, the research house has lowered its earnings forecast for next year.

Its loss expectations for the year now stands at $133 million versus $66 million previously, as it is anticipating the industry upturn to take longer than expected.

The brokerage is also positive after recent news of Borr Drilling, SembMarine's largest debtor, securing some medium-term work for its jack-up rigs.

"Mist, in particular, is an important rig to note given that it was supposed to have been warm stacked but instead recently won a short-term contract in South-east Asia," said Mr Loh.

Warm stacking is where a rig is taken to port but kept running in a similar state to as if it was operating. Lights will be left on, engines will be up and running and there is a far smaller crew on board.

"Importantly, Borr's second-quarter results appeared decent with a 13 per cent quarter-on-quarter increase in operating revenue to US$55 million (S$74 million), while adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) was US$3.7 million versus an Ebitda loss in the first quarter."

Shares of SembMarine were trading flat at 8.6 cents as at noon on Monday.

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