Sembcorp Marine - Re-rating catalysts ahead
- FY16 results broadly in line; no major impairments.
- Sizeable new order for Gravifloat’s modularised LNG terminal in the pipeline.
- In talks with several buyers for the undelivered jackup rigs to Perisai and Oro Negro.
- Upgrade to BUY; TP raised to S$1.78.
Upgrade to BUY with higher TP of S$1.78, based on 1.5x FY17 (from 1.3x previously) P/BV.
- 4Q16 operating results were in line, and overall “exceeded” market expectations for an impairment-led earnings disappointment, removing one near term downside risk.
- We see re-rating catalysts ahead for Sembcorp Marine (SMM) stemming from:
- SMM as a pure play to ride the oil price recovery, playing catch up with peer Keppel Corp; SMM has underperformed Keppel Corp by c.10% since end-2016;
- sizeable new orders for non-drilling solutions, in particular Gravifloat’s modularised LNG terminals;
- conclusion of jackup sales; and
- reactivation of Sete’s projects.
In final talks for first Gravifloat’s modularised LNG terminal order.
- SMM’s orderbook declined by S$2.6bn y-o-y to S$7.8bn (incl. S$3.1bn of Sete projects) as at the end of Dec 2016, due to dismal order wins of S$320m during the year.
- Order wins are set to recover this year with several modularised LNG terminal contracts in the pipeline, each ranging from S$200-300m (for importing LNG terminals) up to c.S$1bn (for exporting LNG terminals).
- We expect these to drive SMM’s order wins to S$2bn this year. SMM has been reportedly in final talks with Chinese conglomerates Poly Group and GCL Group for LNG solutions.
Disposal of undelivered jack up rigs.
- SMM has seven outstanding jackup rig orders, which are all at advance stages of construction.
- Besides the BOT Lease unit which will likely be delivered to customer next year, SMM is in talks with several potential buyers for the five undelivered jackup rigs to financially distressed Perisai and Oro Negro, and one terminated rig by Marco Polo.
- We believe these rigs have been marked down by c.30% through the provisions made in 4Q15. Successful disposal of these rigs at breakeven price and above will free up capital and eliminate a key overhang on SMM.
- Our target price of S$1.78 is based on 1.5x FY17 P/BV, on the back of mid-single-digit ROE. This valuation is 1SD below mean and reflects the recovery post Asian Financial Crisis.
- 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 new-building activities, execution risks in new product types, and disposal of jackup rigs at a loss.
- Upside risk could come from privatisation or M&A activities, as well as write-back of the provisions with successful deliveries or vessel sales.