UOB Kay Hian has upgraded Sembcorp Marine to a "buy" on the basis that many of the negatives surrounding the company are priced in at current levels.
The struggling Singapore-listed shipyard group is in the midst of a SGD 1.5bn ($1.1bn) rights issue, its second cash call in a little over 12 months.
"Post its rights issue, Sembcorp Marine should be in better shape to weather market conditions over the next 12 to 18 months and hopefully enable it to garner new order flow," said UOB Kay Hian head of research Adrian Loh.
The Singapore-based analyst has set a target price for Sembcorp Marine’s shares of SGD 0.11 each, which represents 28% upside from current levels.
Despite the upgrade, Loh says there is still plenty of downside risk for Sembcorp Marine including a more prolonged trough cycle for the offshore marine industry as the oversupply of rigs continues to depress utilisation rates and day rates.
He said the company could also suffer if there is a persistent lack of demand for drilling rigs if oil companies continue to hold off on offshore capex spending, while a prolonged Covid-19 endemic could continue to crimp the supply of labour for its shipyards.
In late July, analysts said the shipyard was short of 4,000 workers forcing it to turn to alternative sources other than the Indian subcontinent.
At the end of July, Sembcorp Marine revealed a net loss of SGD 647m on revenue of SGD 844m for the first half of its 2021 financial year.
The loss included provisions of SGD 472m that were largely connected to higher provisions of manpower and other related costs to complete most of its existing projects.
Loh said he has left the earnings estimate for Sembcorp Marine for 2021 unchanged, but has taken the opportunity to lower 2022 earnings, with loss expectations now at SGD 133m versus a loss of SGD 66m previously, as he forecasts the industry upturn to be longer than expected.
As at end-of the first half of 2021, Sembcorp Marine had a net orderbook of SGD 1.76bn of which around 34% are related to green energy solutions.
Loh cautioned investors that they may have to "exercise a considerable amount of patience given the uncertainty around the timing of an upturn in the offshore renewables and marine industry".
Separately, Macquarie’s Foo Zhiwei has also recently upgraded Sembcorp Marine’s shares, but just to ‘neutral’ from ‘underperform’.
The Singapore-based analyst has set a price target of just SGD 0.08, which implies a 7% decline from the current share price.