The worst is probably over for Sembcorp Marine (SembMarine) as it reported deeper losses for the FY2021 ended December, say analysts.

On Feb 25, SembMarine reported a deeper net loss of $523.3 million for the 2HFY2021, 34.1% higher than the net loss of $390.4 million in the 2HFY2020.

 

The half-year results brought FY2021&rsquo s loss wider to $1.17 billion from FY2020&rsquo s loss of $582.5 million.

CGS-CIMB Research analysts Lim Siew Khee and Isabella Tan have maintained their &ldquo hold&rdquo recommendation with an unchanged target price of 9 cents.

The unchanged target price pegs SembMarine at P/BV of 0.8x for the calendar year (CY) 2022. The valuation represents a 20% discount to its three-year historical average of 1x.

 

To them, SembMarine&rsquo s net loss for the 2HFY2021 stood below their forecast of a $625-million loss.

In their Feb 26 report, Lim and Tan say that this will probably be the last round of major provisions as the gradual reopening of borders means an easing of labour shortage in Singapore. This will, in turn, reduce the cost of bringing in new labour.

Therefore, management does not expect further significant provisions as the current manpower level is sufficient to complete existing projects, say the analysts.

 

The easing of labour costs may be a key reason behind SembMarine&rsquo s guidance of a &ldquo significantly better financial performance for FY2022,&rdquo write the analysts.

 

In the FY2022, SembMarine&rsquo s prospects look to be shaping up. Year-to-date, the company has delivered three out of 12 projects scheduled for 2022. It is also on track to conclude negotiations on project completion terms with its key customers and is likely to see stronger revenue contribution in 1HFY2022, note the analysts.

 

&ldquo Management sounded positive about some contract wins by 1HFY2022 with contract size on average ranging from $500 million to $1 billion. Some of the contracts underway include the EPC contract for US$2 billion ($2.72 billion) Dorado FPSO and Antarctic support vessel for the Brazilian Navy,&rdquo they add. &ldquo Rising oil prices [as at Feb 26] could provide impetus for deferred expenditure by oil companies.&rdquo

Looking ahead, the analysts see scope &ldquo for narrower discount on consistent order win momentum, earnings recovery or clear strategy from enlarged entity with Keppel O& M. The indicative order book for both yards could reach $6.4 billion based on end-2021 reported figures&rdquo .

DBS Group Research analyst Ho Pei Hwa has also kept &ldquo hold&rdquo on SembMarine with a slightly higher target price of 9 cents from 8 cents previously.

The marginal lift in his target price is due to the smaller-than-expected losses in the FY2021, still pegged to 0.7x P/BV or 1.5 standard deviation below its mean valuation since 2014, says Ho in his Feb 28 report.

 

&ldquo We could raise SembMarine&rsquo s target valuation multiple on more signs of a firm recovery in orders, operational improvement, and a successful yard merger with synergy creation,&rdquo he writes.

As at end-2021, SembMarine reported a net orderbook of $1.1 billion, of which Ho estimates that it secured some $800 million in new orders in 2021.

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While the figure is an improvement from the zero orders in 2020, Ho notes that the figure &ldquo remains a far cry from [SembMarine&rsquo s] breakeven revenue of $2 billion&rdquo .

As such, order wins are critical for the company.

 

To Ho, the pick-up in new orders in the FY2021 are &ldquo positive&rdquo .

He adds that &ldquo rising oil prices bode well for capex increase by oil majors, leading to potentially stronger order flows for production facilities. Growing offshore renewable orders is a strategic move for long-term growth&rdquo .

The next key event for SembMarine, says Ho, is the proposed merger between the company and Keppel O& M, which is pending details since the signing of a non-binding memorandum of understanding (MOU) in June 2021.

 

The way Ho sees it, the merger is &ldquo a long-term positive for SembMarine, creating revenue and cost synergies. However, in the near term, some uncertainties hover around the valuation of yards and potential integration hiccups.&rdquo

That said, key risks include sustained low oil prices, which would affect capex, and new building activities and execution risks in new product types.

UOB Kay Hian analyst Adrian Loh is the only one to keep &ldquo buy&rdquo on SembMarine. His target price at 11 cents is also the highest amongst the three houses.

 

The unchanged target price is &ldquo based on a target multiple of 0.88x, pegged to our 2022 estimated book value per share of 13 cents. Our target P/B multiple is a 20% discount to the company&rsquo s past-five-year average P/B of 1.1x,&rdquo writes Loh in his Feb 28 report.

 

&ldquo Note that we had previously applied a 30% discount but we now view a lower discount as more reasonable given the expected turnaround in the company&rsquo s fortunes. With its $1.5 billion rights issue completed, and Temasek&rsquo s mandatory general offer at 8 cents per share having lapsed in early-November 2021, we believe that much of the corporate-level risk has dissipated,&rdquo he adds.

In the same report, Loh has also upped his net profit numbers for FY2022 and FY2023 as he now expects SembMarine to see breakeven due to better guidance from the company.

Unlike the rest of the analysts, however, SembMarine&rsquo s results for the FY2021 stood larger than Loh&rsquo s expectations. That said, the company&rsquo s FY2021 revenue stood &ldquo slightly ahead&rdquo of Loh&rsquo s estimates. Loh also noted that the better sequential performance in the 2HFY2021 was also a positive for SembMarine.

 

To him, the key highlights from the company&rsquo s results were: the promise that 2022 would be &ldquo significantly better&rdquo than 2021, as well as the solving of the labour issues from the 4QFY2021.

Following the $1.5 billion raised, Loh notes that SembMarine is now in an improved financial position. The proceeds &ldquo can be used more ably to execute and complete the projects as well as for working capital needs for new orders and projects,&rdquo he says.

 

On the higher carbon taxes announced during Budget 2022, Loh says that the increase in taxes are unlikely to impact SembMarine in a major way.

&ldquo For its offshore marine customers, there may be a significant increase in taxes and thus project economics need to increase to cater for this. On the other hand, we note that renewables projects which have no carbon taxes then become more attractive to SembMarine&rsquo s customers,&rdquo writes Loh.

 

To him, catalysts to SembMarine&rsquo s share price includes new orders for rigs, offshore renewable installations or fabrication works as well as repairs and upgrades work for cruise ships and other commercial vessels. A merger or joint ventures (JVs) with other shipyards may also contribute to an increase in SembMarine&rsquo s share price.