Sembcorp Marine - DBS Research 2016-10-26: Dividend downtrend to continue

Sembcorp Marine - DBS Research 2016-10-26: Dividend downtrend to continue SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Dividend downtrend to continue

  • 3Q16 swung to a loss of S$21m, dragged by losses from associate - Cosco - and forex.
  • Slashed FY16/17F earnings by 55/27% after lowering EBIT margins by 3.6ppts/2.7ppts.
  • On a positive note, balance sheet and cash flow are stronger.
  • Maintain FULLY VALUED; TP lowered to S$1.15.


Reiterate FULLY VALUED rating with lower TP of S$1.15, based on 1.0x FY16 P/B. 

  • Following a disappointing set of 3Q16 results which swung into a loss of S$22m, we have cut FY16/17F earnings by 55/27% to factor steep margin contraction. 
  • The interim dividend of 1.5 Scts paid in 3Q16 works out to be c.43% of our revised FY16 forecast. This raises some concerns on the final dividend. 
  • We now expect Sembcorp Marine (SMM) to declare a final dividend of only 0.5 Scts as a token of appreciation to shareholders.


Challenging operating environment despite recent oil price recovery. 

  • While SMM had made provisions of S$609m for 75% of the outstanding rig orders in FY15, additional provisions could still be required if the operating environment deteriorates further, especially in Brazil, which accounts for 35% of SMM’s orderbook.
  • Deferment and cancellation risks remain prevalent in the current climate. The delivery of the deferred units (for Sete, Transocean, Oro Negro, Perisai, Seadrill) will have to come through to improve operating cash flow and lower its high net gearing of 1.0x.


Declining order book. 

  • Its orderbook declined by S$800m q-o-q to S$8.4bn as at the end of Sep 2016, and is set to decline further as we anticipate order flows to remain sluggish. The orderbook stands at S$5.2bn excluding Sete’s rig orders. 
  • We believe rig orders are unlikely to make a comeback anytime soon, given the supply glut amid the oil crisis. 
  • New order wins of S$3.2bn in 2015 came from two sizeable contracts to build a fixed platform and the world’s largest semi-submersible crane vessel. 
  • We expect SMM to secure S$1bn in new orders in 2016. SMM has clinched orders worth S$320m year-to-date.


Valuation

  • Our target price of S$1.15 is based on 1.0x FY16 P/B, on the back of mid single digit ROE. SMM’s book value was written down after the massive S$609m provisions in FY15.


Key Risks to Our View

  • Key downside risks are sustained low oil prices which affect rig count and newbuilding activities, execution risks in protected markets, especially Brazil, and further deferments/cancellations.
  • Upside risk could come from privatisation or M&A activities as well as write-back of the provisions with successful deliveries or vessel sales.




Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-10-26
DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 1.15 Down 1.200



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