Saturday 7 March 2020

Sembcorp Marine- No end in Sight and Possible Privatisation Target?

Just when we thought the oil and gas downturn is over, it seems the night just got darker. Sembcorp Marine, one of the bellwether company, posted a higher year on year losses. Loss per share was at 6.5 cents per share. Sembcorp marine's financial results can be found here.

Here are two insights into the company:

1) Construction of Rigs and other offshore vessels is still weak

This is the main business of Sembcorp Marine and is found in Pg 21 and 22 of the financial report. As observed, revenue in this segment has fallen along with a wider loss. That said, revenue recognition for such business is lumpy and it could be that in 2018, SembCorp Marine recognised a larger portion of its projects. Hence we turn our attention to Sembcorp Marine's order book. It is seen that the company has not replenished its orderbook and it has fallen from 3.1Billion to 2.4 Billion as of end 2019. It means Sembcorp is not getting enough orders to replace the older projects it is completing or completed

A lack of orderbook mean significantly lesser revenue will be recognised in the near term. With fixed overheads to cover, it is likely Sembcorp Marine is going to post another financial loss for FY2020.

2) Weak Cashflow

This can be seen in Pg 11 of the report. Operating cash flow before working capital changes was a positive $103 million. Sembcorp is paying $108 million for interest on its loan and receiving about $68 million from dividends and finance sources. Furthermore with the need to pay about $300 million to maintain its plant and equipment, the conclusion is that the current business is in a net cash outflow situation. With $380 million in cash reserves left, its going to be tough on Sembcorp Marine

Possible Privatisation Play

Given the large fall in share price and weak fundamentals, my opinion and possibly the market's as well is that there may be plans to consolidate Keppel Marine and SembCorp Marine into one entity to reap cost savings.

Sembcorp Marine is struggling on its own and with our sovereign wealth funds not coming in to act as a back stopper; if no merger is going to happen, it is likely Sembcorp Marine will sink.

Hence how much will Sembcorp Marine be privatised at?

To me, a price book of about 0.7 times is the likely number (this means 70 cents). This is because business condition in the oil and gas is still deteriorating and we are right now in a monetary easing scenario with QE and close to negative interest rates, yet Sembcorp Marine is struggling!

Hence the acquirer is likely to only buy where there is a significant discount to its current book value of $1.03 per share which is set to decline again this financial year. 

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