Deep Dive into an O&G stock

Sembcorp Marine provides innovative engineering solutions to the global offshore, marine and energy industries. Headquartered in Singapore, the Group has close to 60 years of track record in the design and construction of rigs, floaters, offshore platforms and specialised vessels, as well as in the repair, upgrading and conversion of different ship types.

Sembcorp Marine’s solutions focus on the following areas: Renewables, Process, Gas, Ocean Living and Advanced Drilling Rigs. Sembcorp Marine’s customers include major energy companies, owners of floating production units, shipping companies and cruise and ferry operators.

Key Statistics

Past Financial Performance

For FY2020, Sembcorp Marine’s revenue declined by more than 47% year-on-year to S$1.51 billion. The sharp decline in revenue can be attributed to the adverse impact from the COVID-19 pandemic resulting in delays in the execution and completion of existing projects.

However, this was mitigated by higher revenue recognition from offshore platforms and specialised shipbuilding projects.

Meanwhile, Sembcorp Marine recorded a higher loss in FY2020, which came in at S$587.20 million. This was attributed to the double whammy of substantial inventories being written down and higher costs in relation to shipbuilding projects.

For the trailing 12-month financial performance, Sembcorp Marine’s revenue dipped a further 4% to S$1.44 billion as the pandemic continues to affect the company’s operations.

With the higher cost of revenue and impairment on property, plant and equipment and right-of-use assets, Sembcorp Marine’s losses further expanded to a whopping S$1.04 billion.

Consensus Estimates

Based on the analyst consensus estimates, Sembcorp Marine has a “Hold” recommendation with a mean target price of S$0.089. This translates into a potential upside of 5.15% based on the share price of S$0.085.

Over the 3 months, analysts have slashed their target price by more than 19%. Despite that, analysts have upgraded its forecasted revenue by 5.10% on back of the diversification into clean energy sector and the recovery in the offshore marine sector.

Recent Rights Issue & Mandatory General Offer

On 24 June 2021, Sembcorp Marine has announced a S$1.5 billion renounceable underwritten Rights Issue, which the net proceeds was used for strengthening the Group’s balance sheet and replenishing temporary working capital depletion.

The Rights Issue was successfully completed in September 2021. With the enhanced liquidity position, the Group will be able to meet its projected operational funding requirements through to at least end-2022.

As part of the Right Issue, Sembcorp Marine’s largest shareholder, Temasek Holdings, provided an irrevocable undertaking to Sembcorp Marine to subscribe for its pro rata entitlement and excess Rights Shares.

As a result, Temasek Holdings has issued a mandatory general offer for Sembcorp Marine’s share at S$0.08 a piece. The offer was closed on 3 November 2021, garnering 8.0% of the total number of shares issued. This brings Temasek Holding’s shareholding in Sembcorp Marine to a sizable 54.6%.

Latest 3Q FY2021 Business Update

In its latest 3Q FY2021 business update, Sembcorp Marine has delivered a number of projects successfully, including:

• The fabrication of two wellhead and one riser topsides and two bridges for deployment to Total Energies’ Tyra East Redevelopment Field which set sail for the Danish North Sea in July 2021.
• Delivery of Offshore Substation (OSS) and Reactive Compensation Station (RCS) in August 2021 to Ørsted Wind Power subsidiary Optimus Wind Limited. The OSS and RCS topsides have been successfully installed in October 2021 at Hornsea 2 Offshore Wind Farm by Heerema Marine Contractors (“Heerema”), using the world’s biggest and strongest semisubmersible crane vessel Sleipnir, built by Sembcorp Marine in 2019 for Heerema.

Meanwhile, the Group’s Repairs & Upgrades business completed several key projects in 3Q FY2021, which includes:

• Torman II: Floating Storage Unit (FSU) conversion and upgrade for Gasfin/NYK.
• Gaslog Singapore: FSU conversion for Gaslog LNG.
• Six LNG vessel refits, including major reliquefaction plant installation projects on Macoma and Magdala for alliance partners Shell and Teekay.
• Naval repairs for the Republic of Singapore Navy and the US Navy

As of 3Q FY2021, Sembcorp Marine’s existing order book stood at over S$1.42 billion, including S$0.18 billion of ongoing repairs and upgrades for delivery by 2022.

Of the Group’s 16 projects under execution, two are scheduled for completion in FY2021 and another twelve in FY2022. The remaining two will progressively be completed by 2025. Here is the list of the 16 projects under execution:

Technical Analysis for Sembcorp Marine

Based on the weekly chart for Sembcorp Marine, after consolidating from the start of the year till the end of March 2021, its share price has experienced a breakout in April 2021. This can be seen from the surge in buying activities, as seen from the volume bar chart displayed above, as well as the various candlesticks which are trading above the upper limit of the Bollinger Band.

Subsequently, its share price underwent a minor correction in May 2021, accompanied by low trading volume and the MACD line trading below zero.

With the announcement of the rights issue in June 2021, its share price saw a sharp drop with high selling volume, hence breaching the 20-Day moving average and its MACD line sinks further below.

Since then, Sembcorp Marine’s share price has been trading below the 20-Day moving average line and its Relative Strength Index (“RSI”) is trading near the oversold territory. In November 2021, its Bollinger band is starting to showcase a form of tightening.

Coupled with the low trading volume and the candlestick is about to breach the 20-Day moving average, this could mean that there is a possibility of a breakout for its share price.

Conclusion & Management Outlook

To conclude, Sembcorp Marine’s financial performance has been severely impacted by COVID-19 and the ongoing weakness in the Oil and Gas industry.

On that note, the latest Rights Issues ensure that the Group has sufficient financial resources on hand to weather the storm ahead of them.

In terms of management outlook, Sembcorp Marine has highlighted that the Group still faces significant challenges and risks given the ongoing COVID-19 pandemic.

Looking beyond the near-term headwinds, the Group expects significant growth in renewables and other clean energy segments over the next decade and beyond. Therefore, the Group will focus on accelerating its transformation to gain further traction in this segment and strengthen its market share.

At the same time, Sembcorp Marine will continue to build on its integrated offshore and marine engineering capabilities to move up the value chain and provide a wider suite of products and solutions for its existing business segments.

With that in mind, this will help to strengthen the Group’s competitiveness in winning more orders and improving its overall profitability over the longer term.

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