Analysts warn Sembcorp privatisation may be off the table

DBS says a yard merger via share swap or asset injection into SMM is more likely.

First quarter updates from Sembcorp Marine's operations have painted a “bleaker picture”, according to DBS analyst Ho Pei Hwa. Like other SGX companies, the firm no longer has to report financials each quarter and instead merely provides a business update. But even this is harrowing reading for investors in one of Singapore’s largest ship building companies.

The full extent of damage caused by the COVID-19 crisis remains unknown, but RHB analyst Leng Seng Choon notes that management guides for overall business activities to further weaken for the remaining year. There is little comfort in the updates that have been given. “Industry-wide capex cuts have affected the group’s ongoing negotiations and finalisation of new orders, including the Siccar Point Cambo Floating Production, Storage and Offloading (FPSO) project. The project’s final investment decision (FID) is now postponed to 2021,” noted Choon.

“Management expects business volumes for all segments to further weaken for the rest of the year and the company will defer all non-essential capex to preserve cash flow and manage
overall liquidity with prudence and discipline. The company’s current priority is to ensure adequate liquidity to sustain operations and ride through this severe downturn,” he added.

It is against this grim backdrop that some analysts have suggested a privatisation may be the best way out, but DBS sees this as an increasingly unlikely prospect, and that may be even worse for investors as they struggle to work out what the company is actually worth in the absence of a privatisation offer.

“We believe yard merger via share swap or asset injection into SMM are more probable scenarios than privatisation, and therefore trickier to predict SMM’s financial and share price impact. Fundamentally, the critical factor for SMM remains its order wins to restore confidence,” DBS’ Ho added.

But clinching new orders may be no easy task and the company is in a race against time to get its operations restarted profitably. DBS noted that COVID-19 has resulted in delays in the
execution and completion of existing projects as well as lower ship repair volume.

“During the Circuit Breaker period, shipyard activities in Singapore are mostly shut except for  repair and upgrades (which account for ~20% of revenue), which are considered essential services,” Ho said.

The iceberg which has really ruptured the hull in Sembcorp’s operations is the oil price drops. Sembcorp is one of the world’s largest makers of offshore oil equipment, and as DBS notes, current low and volatile oil price levels have resulted in major oil companies deferring their final investment decisions (FIDs) for projects and cutting back their capital expenditure (capex) by 20-30% for 2020. 

Not only has this has significantly affected SMM’s order wins for the foreseeable future, the sanguine fact remains that it has yet to clinch any contracts for the year. And the most worrying fact of all for investors is that the group expects its losing trend to continue in the foreseeable quarters.