Sembcorp Marine - Brightened Oil Outlook
- OPEC’s output cut brightens oil outlook.
- Higher oil prices could motivate customers to take delivery and place orders for production facilities.
- Upgrade to HOLD; TP S$1.55.
Upgrade to HOLD with higher TP of S$1.55
- Upgrade to HOLD with higher TP of S$1.55, based on 1.3x FY17 P/BV (1.0x previously), which is in line with 1.5SD below mean (2SD previously) and recovery valuation post AFC.
- We believe risk premium should be reduced with improving O&G outlook following OPEC’s successful agreement to cut output. The sector recovery should “motivate” customers to take delivery of existing units and place orders for production facilities.
- However, the operating environment remains challenging with yard overcapacity.
Declining order book.
- SMM’s orderbook declined by S$800m qo-q to S$8.4bn as at the end of September 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. 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.
Shipyard merger on the cards?
- While its macro outlook has improved, the rigbuilding sector is on a structural downturn, in our view. The restructuring of Brazilian customer continues to be an overhang and deferment and cancellation risks remain prevalent in the current climate. Both Singapore rigbuilders have been rationalising their operations since early 2015 to cope with the lower activity level. A merger could make sense to further streamline their operations, achieve cost synergies and eliminate competition.
- Our target price of S$1.55 is based on 1.3x FY17 P/BV, 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 by 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