Is Sembcorp Marine’s 110% upside potential justified?

Despite Sembcorp Marine’s less-than-stellar earnings update for 1H 2021 on Monday, analysts continue to hold out for a strong stock price recovery.

  • SembCorp Marine Ltd (SGX: S51) share price lowered to S$0.12 on Monday (12 July 2021)
  • The offshore and marine stock fell after it guided that 1H 2021 losses will be close to that incurred for the whole of FY2020
  • The group said this was due to provisions made for increased costs associated with delayed projects over the next two years
  • UOB and OCBC analysts are bearish on the stock, rating it ‘hold’ and ‘sell’ respectively
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Sembcorp Marine share price: what’s the latest?

Sembcorp Marine shares fell as much as 2.5% after saying it expects losses for 1H 2021 to be in the region of losses incurred across the whole of FY2020.

This is due to provisions made for increased costs associated with the group’s ongoing projects in FY2021 and FY2022, the offshore and marine company said in its latest profit guidance for the half year ended 30 June 2021.

These provisions will have a ‘material adverse impact’ on the group’s 1H 2021 results, it added.

SembMarine explained that most of its projects have been delayed by at least 12 months since the onset of the Covid-19 pandemic in 1Q 2020.

In order to complete the projects, it has been actively recruiting additional skilled labour from non-traditional sources, which cost more than twice of traditional employment means on average.

The group also expects to incur additional costs due to work re-scheduling, extra sub-contract work, additional material usage and other staff turnover related costs arising from delays in project execution.

Consequently, the group says that it will make provisions in its 1H 2021 results for ‘these significant additional manpower costs to be incurred over the next six to 18 months’.

How do analysts view the SembMarine stock?

The counter is down by 19.33% year to date. The latest analyst sentiments published by SGX StockFacts show a consensus rating of ‘underperform’ and a target price of S$0.255 on the securities.

The target price, however, equates to a massive 110% upside potential from the stock’s last traded price of S$0.12 on Tuesday (13 July 2021).

The latest investment thesis came from UOB analyst Adrian Loh, who rated the stock a ‘hold’ alongside a price target of S$0.124 on 07 July 2021.

Although Loh kept his ‘market weight’ call on the offshore and marine sector in the same note (thanks to ‘improving industry conditions’), he cited Sembcorp Marine as the exception to the rule.

‘In our view, the market will focus less on the company’s results but instead look for any comments on progress of the merger with Keppel O&M,’ Loh wrote.

‘Post the recent US$175 million win for modification works for an FPSO (floating production storage and offloading) in Brazil, we would also keep an eye out for comments regarding potential order wins over the next 12 months,’ he concluded.

Meanwhile, OCBC analysts on 25 June lowered their rating on the stock to a ‘sell’ and price target to S$0.09 a share from S$0.145 previously.

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