Sembcorp Marine Undertakes a Strategic Review: Can the Marine Giant Return to Profitability?

There have not been many mega mergers and acquisitions in the Singapore corporate scene.

A recent one saw the merger of two Mapletree REITs, Mapletree Commercial Trust and Mapletree North Asia Commercial Trust, in a S$4.2 billion transaction to form an enlarged Mapletree Pan Asia Commercial Trust (SGX: N2IU).

The other major transaction is that of the union of Sembcorp Marine Ltd (SGX: S51), or SMM, with the offshore and marine (O&M) division of Keppel Corporation Limited (SGX: BN4).

First announced back in April 2022, the original S$9.4 billion planned mega-merger has undergone a revision and morphed into an acquisition, instead.

Last month, SMM finally received overwhelming support from its shareholders to seal this acquisition and accelerate its transformation into a premier oil and gas player.

Meanwhile, the group has also announced a “bottom-up” strategic review to return to profitability and deliver on its huge order book.

The question is, can investors finally see the marine giant churn out a profit this year?

Another lacklustre set of numbers

To be sure, investors can be forgiven for having their doubts as SMM continued to post a lacklustre set of financials for 2022.

Although revenue rose 4.6% year on year to S$1.9 billion, a higher cost of goods overwhelmed the group, causing it to post a gross loss of S$132.2 million.

Operating loss came in at S$206.4 million while net loss clocked in at S$261.1 million.

Management did highlight, though, that this level of operating and net loss was 83.1% and 77.7% lower than the prior year, respectively.

Another bright spot was SMM’s cash flow statement, which saw the offshore giant generate a positive free cash flow of S$1 billion last year, a sharp reversal from the negative free cash flow of S$637.3 million in 2021.

The promise of a new day

There could be more good news coming.

The acquisition of Keppel O&M has created a larger and more established player in the sector that offers a wide range of services, including world-class engineering capabilities and global operational scale.

SMM had done a good job of clinching contracts of more than S$7 billion during 2022 for construction, development, repair and upgrade orders.

As of 31 December 2022, SMM had an order book of S$6.75 billion, of which renewable and green solutions took up 37%.

With the acquisition, the combined entity’s order book will more than double to around S$18 billion comprising more than 40 ongoing projects involving around 23,000 personnel.

According to SMM, its larger size will enable it to achieve economies of scale and allow it to capture larger contracts in an improving oil and gas landscape.

It did warn, however, that the integration process may present challenges but that the enlarged group expects to enjoy synergies from its broader geographical footprint and enhanced capabilities.

Undertaking a crucial strategic review

There’s no better time to undertake a strategic review as SMM now has a new CEO, Chris Ong, on board.

The group also has a new chairman of the board Mark Gainsborough, a veteran who used to work at Shell PLC (LON: SHEL).

Mr Gainsborough said the board of directors wants to ensure that SMM can smoothly deliver its existing workload.

Two key areas to be looked at include the group’s headcount and yard facilities.

Layoffs have not been ruled out thus far but if these do occur, they will be structured and phased and be accompanied by swift communication with employees to minimise disruptions.

The enlarged entity will also have yard facilities located in eight countries – the UK, China, the US, Brazil, Norway, Japan, the Philippines, and Indonesia.

A rationalisation could be on the cards as SMM reviews the group’s geographical footprint.

In another promising development, the new entity is aiming to scale up its footprint in the offshore wind energy value chain and develop new energy solutions.

These moves will open SMM up to new sources of revenue in future and broaden its skill set.

Finally, a new name for SMM is also set to be unveiled soon as the group charts a new future for itself.

Get Smart: Execution is key

These are exciting times for investors as SMM embarks on a newly-forged path.

Post-acquisition, the larger entity is now better equipped to take on bigger projects and is also helmed by new managers.

However, execution remains key and the group needs to ensure it can deliver as promised and control costs effectively.

The strategic review may throw up good options for SMM to reduce its fixed cost base, but profitability may still be some time away.

Investors will need to be patient as the new and enlarged SMM reports its first set of earnings for June 2023.

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Disclosure: Royston Yang does not own shares in any of the companies mentioned.

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