Potential Keppel, SembMarine merger is ‘a positive’: IG analyst

• Keppel Corp Ltd (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51) requested for a trading halt on their shares on Thursday (24 June 2021)
• It was then reported that both companies are due to starting discussions on the possibility of combining their offshore and marine businesses
• IG analyst Yeap Jun Rong believes that a business combination could help to boost the financial abilities of both companies through the recovery ahead
• Both stocks have performed poorly in the last 12 months, with Keppel down 15% and SembMarine down 38%
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Keppel and SembMarine to discuss potential combination

Keppel Corporation and Sembcorp Marine both halted their trading counters on Thursday, citing the pending release of announcements.

Later, Reuters reported that both companies are on the verge of starting talks to combine their struggling offshore and marine businesses.

The discussions between the boards of both companies could ultimately take many months, the report added, quoting two sources familiar with the matter.

A merger of both entities will see one of the world’s largest offshore oil rig builders join forces with its smaller local rival to take on a sector that has been plagued by years of challenges in the form of oversupply and oil price declines.

Keppel Corporation has a market capitalisation of S$9.3 billion while Sembcorp Marine has a market cap of S$2.39 billion as of 23 June 2021. Singapore sovereign wealth fund Temasek holds majority stakes in both companies.

IG market strategist Yeap Jun Rong said a business combination may enhance the financial abilities of both companies through the recovery ahead.

‘As the oil industry continues to recover from the Covid-19 impact, the potential consolidation of operations within the industry may be a positive by driving economies of scale and potentially lead to cost savings,’ he noted.

Both companies have scheduled separate press conferences later on the same day.

How do analysts view both stocks?

Meanwhile, the stock prices of both companies have also performed poorly in the last 12 months, with Keppel shares behind by 15% and Sembcorp Marine’s down by 38%.

Latest analyst sentiments published by SGX StockFacts show a consensus rating of ‘outperform’ and price target of S$6.16 on Keppel shares. The price target represents a 20% upside potential from the stock’s last traded price.

The latest rating came from UOB’s Adrian Loh, who reiterated a ‘buy’ call and price estimate of S$6.37 on the stock. This is despite a lowering of his earnings forecast for Keppel’s 2021 financial year by 19% due to recent KrisEnergy-related losses.

On the other hand, analysts have given Sembcorp Marine a consensus rating of ‘underperform’ alongside a target price of S$0.24. This equates to a 26.3% upside potential in the next 12 months.

Most recently, Macquarie gave a ‘neutral’ recommendation with a S$0.16 target price, while CIMB analysts issued a ‘hold’ call alongside a S$0.14 target.

SembMarine had said in its interim business update for the first quarter of 2021 that it expects losses to continue for the rest of the year, as it continues to face supply-chain constraints and a shortage of skilled workers due to the Covid-19 pandemic.

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