Analysts positive on Sembcorp Marine after 'landmark' EUR6 bil renewables contract win

Bryan Wu
4-min read

CGS-CIMB and UOB Kay Hian have kept their “add” and “buy” calls, while Citi Research is the only brokerage to keep its "sell" call

Analysts are all positive on Sembcorp Marine’s (SembMarine) latest development where the company secured a renewables contract worth EUR6 billion ($8.68 billion) on March 30. The contract was clinched together with SembMarine’s consortium partner GE Renewable Energy’s Grid Solutions (GE).

However, they remain mixed in terms of the company’s outlook with CGS-CIMB Research and UOB Kay Hian retaining their “add” and “buy” calls. CGS-CIMB analysts Lim Siew Khee and Izabella Tan have upped their target price to 19 cents from 12 cents previously while UOB Kay Hian’s Adrian Loh has kept his target price at 15.6 cents.

Citi Research analyst Jame Osman is the only one who has kept his “sell” call with a target price of 10 cents.

Analysts deem win as a ‘new benchmark’

CGS-CIMB’s Lim Siew Khee and Izabella Tan estimate SembMarine’s share of the contract to be at 60% of the total or $5.3 billion, which brings the company’s total orderbook to $23.1 billion.

Calling the latest contract a “new benchmark” for SembMarine as one of the biggest projects won in terms of capacity, the analysts also note that SembMarine’s latest orderbook is close to the peak combined orderbook of both Keppel Offshore & Marine (Keppel O&M) and SembMarine from FY2012 to FY2014.

“With this win, we raise our annual order win expectations to $7 billion for FY2023, and $4 billion each for FY2024 and FY2025 (previously $3 billion per annum or p.a.),” they write in their March 31 report.

“As at February, renewable projects contributed [around] 8% of orderbook for the enlarged entity. The GEconsortium order will lift [SembMarine’s] renewable energy (RE)’s contribution to [around] 30%,” they add.

To this end, the analysts see that SembMarine’s sizeable order book could be the key driver for its share price although it could incur integration costs/losses over the next year.

UOB Kay Hian’s Loh estimates that Sembcorp Marine holds a 50% share of this “landmark” contract and says that the company’s order book has increased by an estimated 24% to $22.3 billion, with earnings visibility out to FY2031.

“We understand that the company’s share of the EUR6 billion contract is around 50%, with front end engineering and design starting later this year followed by construction commencing in 3QFY2024 at its Singapore and Batam yards and then delivery of the first platform over the 4QFY2029 to FY2031 period,” he explains.

“We see this order win as a clear vote of confidence by key industry players as this contract has been in negotiations in the past 12 months and during Sembcorp’s merger with Keppel O&M,” he adds.

While SembMarine did not release other financial details, Loh estimates the project’s net margins should be around 10% “or so”.

“With the contract being in Euros, we expect SembMarine to hedge its Euro exposure prior to receiving first payment,” he writes.

Following SembMarine’s latest order win, Loh notes that the company needs to start delivering profits in the 1HFY2023 to prove that it is able to “reliably and profitably construct its projects, and continue its momentum of new-order wins from FY2022”.

On SembMarine’s announcements regarding its Brazilian subsidiary, Loh says the company’s previous provisions of $370 million made in 2015 is already “sufficient” for now.

Meanwhile, Citi’s Jame Osman remains less upbeat about SembMarine even though he sees its latest order win as a “positive step forward” in its move to transition to renewable/green energy related projects.

That said, the analyst says he remains cautious in the near term on several key risks, while current valuations look to be pricing in an optimistic bull case recovery scenario for operational performance.

Osman says that considering both SembMarine and Keppel O&M’s “relatively nascent” track record in the space of renewable energy, project execution and margin performance are still uncertain.

In the near-term, his risk factors include restructuring and yard integration costs post-combination, persistent supply chain/cost inflation issues, as well as customer concentration and order deferment risks — Petrobras orders account for over 80% of the company’s order book — which may not be adequately discounted by the market, particularly considering the recent overhang relating to renewed investigations at its Brazil yard EJA.

“At current share price levels, we think the market could be valuing the enlarged SembMarine at around 10x to 15x price-to-earnings ratio (P/E) on our bull case scenario estimates. Nevertheless, we currently have a 90-day positive catalyst watch (CW) due to potential index inclusions, and as order win announcements could provide share price support in the near term,” says Osman.

As at 2.23pm, shares in SembMarine were trading 0.5 cents or 4.35% up at 12 cents.

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