Tuesday, 23 February 2021

Sembcorp Marine- Current NAV of 29.2 cents and losses of 4.6 cents LPS

Sembcorp Marine (SCM) has released its full year results, with a loss of 4.6 cents per share (after factoring the enlarged share base). The current net asset value per share is now 29.2 cents per share. This is shown in page 8 of its financial results.

What does the Future Hold?

I am maintaining my prediction that SCM will make 1.1 cent per share loss for 2021. This is because SCM has a few contracts left and does not seem to be fully utilising its yards (However i will re-evaluate the losses post 1HFY results to gauge the company's value).

Investors can expect SCM to deliver the last 2 Transocean Drillships this year because one of them has secured a contract to start operations in the fourth quarter of 2021 with Chevron. Cost of the 2 drillships stated in Transocean report is US$1.93 billion (S$2.56 billion). With delivery in FY21, a significant portion will be recognized as revenue, which I estimate is around SGD $1 billion. With other projects and ship repairs, SCM FY21's revenue will be at least on par or better than FY20.

Orderbook

Assuming a full workforce rate, SCM's orderbook will last until end 2022 based on extrapolation. It is likely SCM will cut its workforce to let its orderbook last longer. 

With the offshore drilling industry now recovering and more rigs put into work, it is likely SCM will get new rig orders secured in 2022. With the market leader, Keppel O&M's exiting, SCM will be able to command good margins for future contracts especially deep water rigs where it is now unrivalled.

Energy demand is increasing quickly now due to the consumption by crypto mining/transactions and growth in data centers. While some banks are predicting a commodity upcycle, similar to the $100 oil seen in 2011-2013, I am less sanguine and expect oil to be at only $80. However, this will result in increased drilling which will support the need to order more oil rigs. 

SCM too will win orders in windfarm installation and that will be another plus point. All in all, an increase in revenue will mean lower losses and eventual profitability for SCM. 

Valuation

At the current reported NAV of 29.2 cents and expected further losses of 1.1 cents (2021) with profitability from 2022, I expect SCM to have a NAV of 28.0 cents before turning its business around. Applying a 30% discount to FY22 forecasted NAV to factor for uncertainty of more losses, the fair value is 19.6 cents, or 25% higher than the current share price of 15.2 cents.

SCM also holds valuable land in Singapore in the form of the new Tuas Yard where Singapore plans to consolidate its trading activities at. The consolidation of port operations at Tuas means SCM ship repair segment will be getting the business of maintaining and repairing ships; after all Keppel Corp is also exiting this segment as well.

Should SCM turn profitable at a quicker pace, this will be a catalyst for the company to be valued at 28 cents as the certainty of continued losses is reduced.

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