CGS-CIMB: Opportunity to accumulate Sembcorp Marine before order boost

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There’s still an opportunity to acquire shares of Sembcorp Marine at a good valuation before positive newsflow on orders drives the stock, CGS-CIMB said after hosting a non-deal roadshow for management.

“SMM is likely to achieve, if not exceed, our order target of S$3 billion in 2018, helped by sizeable production/gas projects, including Gravifloat,” the brokerage said in a note dated Tuesday.

“SMM has done advanced front-end engineering and design (FEED) work for gas export terminal Gravifloat for Chinese GCL-Poly. We believe finalisation of the contract is likely in 2018. Contract size for phase 1 could be circa US$1 billion. The proof of concept of Gravifloat will open the door for more orders, in our view. Currently, SMM is in talks with more than one potential customer for the design.”

CGS-CIMB noted it expected margins to be compressed at around 7 percent over 2018-19 amid the “high turnkey” nature of the project, but it expected margins for other newbuild FPSO projects could be better than for the Libra FPSO, which saw cost overruns.

“Upside could come ramping up the learning curve on newbuild FPSO,” it said.

It noted that the stock is currently trading at 1.85 times 2018 price-to-book value, compared with the 20-year average of 2.5 times, with the brokerage used to set its target price of S$3.01. It kept an Add call.

The stock was down 0.91 percent at S$2.19 at 10:05 A.M. SGT on Wednesday.