Compiled by Navin Sregantan
| NEUTRAL (DOWNGRADED)
JULY 31 CLOSE: $1.35
TARGET PRICE: $1.59
KGI Securities, July 31
Sembcorp Marine's Q2 performance was a clear disappointment, with full-year guidance of a loss similar to last year's loss of around $74 million. Furthermore, order wins have been significantly weaker than expected.
SembMarine's net gearing remains elevated at 1.4 times as at end Q2, a level which we think raises the probability of a rights issue in the next 6 to 12 months.
The investigations surrounding SembMarine's Brazil operations may continue to be an overhang on its share price. In the worst-case scenario, should SembMarine be fined US$422 million (S$578 million) - the amount that Keppel Corp was fined in 2017 - our fair value for the stock drops to $1.15.
That said, SembMarine is well positioned to gain when the oil industry recovers in South America.
While SembMarine is trading at rock-bottom valuations, there is uncertainty from Brazil investigations and slow order win momentum.
Although industry recovery is underway, we expect SembMarine's earnings to remain weak until 2021 given the intense competition and compressed margins as it diversifies into new projects.
The most significant risk to our view is the possibility of a rights issue to lower its high debt level.
| HOLD (DOWNGRADED)
JULY 31 CLOSE: $0.51
TARGET PRICE: $0.48
UOB Kay Hian, July 31
Q2 FY2019 core net profit declined 56 per cent year-on-year (yoy), missing more than 50 per cent of our and consensus' full-year estimates.
The miss was mainly due to low broiler average selling price (ASP) in Indonesia, and low swine ASP in Vietnam due to lower consumer demand as a result of the African Swine Fever (ASF).
The dairy segment's core profit declined 7 per cent yoy in Q2 due to higher feed cost of corn prices and higher cost of imported alfalfa.
Also, the consumer food segment continued to report a loss due to intense competition. We slash our FY2019-2021 earnings per share by 24 to 25 per cent and our target price by 34 per cent.
Uncertainties from ASF in Vietnam and demand supply imbalances in Indonesia could be the near-term overhang for earnings and share price.
Share price catalysts include better-than-expected prices for Indonesia poultry, China dairy and Vietnam swine products. Reversal of rupiah weakness is also a positive catalyst.
The suggested entry price is $0.42.
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