EUR 850.00 For Business Accounts Only

Morningstar | Sembcorp Marine Returns to the Black in 4Q; Shares Still Overvalued

Sembcorp Marine, or SMM, has five major shipyards in Singapore and is establishing a network of overseas yards with capabilities ranging from simple repair and upgrades to complex module configuration and rig building. Though it lacks the geographic breadth of major competitor Keppel, its strategic locations provide strong coverage in key growth markets, including Brazil and Southeast Asia.SMM’s major product is a proprietary rig, which hasn’t been as popular as Keppel’s KFELS Class B jack-up rig. However, SMM still boasts solid experience in rig-building and a stronger track record of delivery than that of its low-cost competitors. This creates a competitive advantage, especially for clients seeking high-specification, high-quality jack-ups while also exhibiting lower price sensitivity. SMM also distinguishes itself in the drillship-building category. In the past, the company has won a series of major drillship orders for its proprietary drillship design. The orders provide SMM with a strong opportunity to prove its capability in delivering more-complex and higher-priced drillships.In view of the recent downturn in oil prices, management is actively promoting its nondrilling solutions such as fixed platforms, floating production storage offloading, or FPSO, and FSO conversions. In addition, the firm is also talking to several potential customers on its broad-based LNG solutions, including its proprietary GraviFloat near-shore floating production terminals. We believe these new solutions could potentially be a key revenue driver for SMM in the next five years.SMM is in talks with Sete Brasil over delayed payments, as the Brazilian Development Bank has denied funding to the latter, which is involved in a corruption scandal. We understand that there may be a potential resolution with Sete Brasil, subject to satisfaction of certain conditions. The firm has made provisions amounting to SGD 329 million for the Sete Brasil contracts in 2015, and we think any positive development will be a catalyst for share prices.