Sembcorp Marine - CIMB Research 2017-02-23: Floating hope

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Floating hope

FY16 core net profit came in at 119% of our forecast and 105% of consensus due to forex gains and tax credits in 4Q16. There were no provisions for impairment.
Order outlook is encouraging as SMM is in multiple negotiations for LNG and FPSO contracts. We raise our orders for 2017 and 2018 to S$2.5bn p.a. (from S$1.5bn).
Raise EPS by 5-28% on lower interest costs and higher orders. Our TP is raised to S$1.88 as we peg it to 1.5x P/BV (1.3x prev.) on better order prospects.

4Q16 net profit of S$34m included non-recurring marked to market losses of S$16m on investments, offset by S$9m tax credit from unutilised tax losses as well as a net forex gain of S$36m due to stronger US$ and GBP.
Recall that as of 9M16, SMM had cumulative net forex losses of S$43m.
Revenue dipped 7% qoq to S$830m mainly from lower offshore platforms revenue (S$200m, -39% qoq).

In contrast to 3Q16, EBIT margin swung from 3.7% (due to forex losses) to 8.1%, thanks to forex gains. Excluding the forex impact, FY16 EBIT margin was 6.5% vs. 10.7% in FY15, in line with weaker operating leverage on lower revenue.
We forecast EBIT margins of 6.7% and 9% in FY17-18F, assuming a less volatile swing in currencies.
Generally, a weaker SG$ vs. US$/GBP would benefit SMM.

SMM is in multiple discussions for modularised LNG and LPG solutions – Gravifloat – one of the companies is Chinese Poly-GCL.
Benchmarking to newbuild FLNG prices, each contract could be over US$1bn. We expect EBIT margins of 8-10% (less than 60% are equipment costs).
Management plans to recruit and re-train its staff to equip it with non-drilling LNG skills, signaling that a contract is close. Its stake in Gravifloat AS will also be stepped up from 56% to 100% upon securing the second contract.

SMM is in discussions with Petrobras for two FPSO hulls:
1. a variation order for P-68 hull and
2. reconstruction of P-71 hull.
Both hulls are partially completed by its Brazilian yard (see our report Overhang removed). These spell hope for more contract wins in 2017.
Building in Gravifloat and Petrobras, we raise our order expectations to S$2.5bn p.a. in 2017 (from S$1.5bn) and 2018 (from S$2.2bn). SMM secured S$320m worth of orders in 2016 with its current order book ex-Sete Brasil at S$4.7bn.

Net gearing stood at 1.14x at end-16.
The Phase 2 yard expansion was completed in Jan 17. We estimate a capex of S$115m in FY17F (S$90m expansionary and S$25m maintenance).
With the expected proceeds of S$221m from Cosco divestment and delivery of OOTGK Libra FPSO (c.S$200m) by 1Q17, net gearing could come down to 0.9x. Upside could come from the sale of jack-up rigs (c.US$160m each).
A final DPS of S$0.01 was declared, bringing the total DPS to S$0.025 or 67% payout.

We raise FY17-18F EPS by 5-28% to reflect stronger orders and lower interest costs.
We raise our TP to S$1.88, based on 1.5x P/BV, benchmarking average trading band from 1996-2003, a period of weak oil prices and pre-rig boom.
Stronger-than-expected orders could be the key catalyst while sudden collapse in oil price could be the key risk.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-02-23

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.88 Up 1.700