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CGS-CIMB maintains 'add' call on Sembcorp Marine following news of probe in Brazil

The Edge Singapore
·2-min read

Contracts from Brazil account for 67% of the combined order book of Sembcorp Marine and Keppel's former offshore and marine unit

Lim Siew Khee of CGS-CIMB has maintained her “add” call and 12 cents target price on Sembcorp Marine, following news that Brazilian authorities have commenced a “preliminary administrative liability proceeding” against the company’s local unit, Estaleiro Jurong Aracruz Ltda (EJA), for alleged “irregularities”.

According to Sembcorp Marine, the notice gave no further details and SMM cannot assess the matter or its impact, if any. EJA is fully cooperating with the authorities.

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“We think the resurgence of negative newsflow on any form of investigation by Brazilian authorities could weigh down Sembcorp Marine’s share price in the near term until further clarity is provided,” writes Lim in her March 24 note.

Back in 2012, Sembcorp Marine won seven contracts from Sete Brasil worth some US$5.6 billion.

The Brazilian agent connected to the contracts were charged and jailed in 2020 and EJA’s previous president was terminated in 2015 and has been under investigation under his personal capacity since 2019.

In 2015, Sembcorp Marine had already provided for $329 million in relation to the Sete Brasil contracts, taking into consideration unpaid invoices, construction progress, and payables to suppliers and vendors, says Lim.

“We are unsure if there was any provision for litigation/investigation/ fines. Sete Brasil filed for bankruptcy in 2016,” she adds.

In 2020, Sembcorp Marine reached a settlement with Sete Brasil for the seven drillships allowing the yard to keep all works on the uncompleted five units and sell the two that were largely completed.

Separately in Dec 2017, Keppel Corp agreed to pay a US$422.2 million fine as part of the global resolution with US, Brazil and Singapore authorities in relation to corrupt payments made by Keppel’s former agent in Brazil, Zwi Skornicki.

Both Keppel, via its former offshore and marine unit, and Sembcorp Marine have significant business in Brazil.

Lim estimates that orders related to Petrobras, the national oil company of Brazil, makes up 67% of the combined order book of Sembcorp Marine and Keppel’s offshore and marine unit.

Keppel had secured orders for two units of floating, production, storage and offloading (FPSO) vessels, P-80 (worth US$2.9 billion) and P-83 (US$2.8 billion).

Sembcorp Marine, meanwhile, has been tasked to build P-82, worth US$3.05 billion.

Lim says her “add” call is premised on how the new management team at the combined entity, trading under Sembcorp Marine, can execute the orders on hand, as well as the pace of turnaround.

Sembcorp Marine shares, as at noon on March 27, traded at 11 cents, up 2.88%.

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