Sembcorp Marine Ltd - Bear starts to turn around
- S$3,545mn FY16 revenue met 99.6% of our full year expectations of S$3,559mn.
- S$293mn FY16 gross profit met 92% of our full year expectations of S$320mn.
- S$75mn FY16 net profit exceeded our full year expectations of S$54mn by 39%.
- 1.0 cent interim dividend declared and 1.5 cent final dividend proposed in FY16, versus 4.0 cents interim and 2.0 cents final dividend declared in FY15.
- Upgrade to “Reduce” as we revise upward our earnings forecast for FY17 by 37% from S$95mn to S$130mn with a higher TP of S$1.58 (S$0.87previously.
Non-drilling segment could be the way out
- Among SMM’s various business segments, the rigs and floaters segment was the worst performer in FY16. The S$1.9bn contribution from the segment was significantly lower by 43% Y-o-Y in FY16. The business was dragged down by frozen orders, deferments and defaults in the market. Over the past two years, SMM failed to secure any fresh projects of drillship and jack-ups. As of end-December 2016, the net order book of such units, excluding those under Sete Brasil contracts valued at S$3.1bn, shrunk to c.S$1.6bn, which could see further delay in revenue recognition. Since the drilling market is still under the trough of cycle. Though oil price rebounded to above US$50/bbl, rig owners and operators still hesitate to initiate a new round of CAPEX.
- Offshore platform segment maintained a moderate growth by 10% and generated S$1.1bn revenue in FY16. The order book was reported at S$887mn by end of FY16. Though it seems like drying up in FY17, the enquiries for non-drilling solutions is gaining momentum.
- Generally, one platform project that is worth a few million dollars can replenish the order book to continue the workflow adequately.
- Repairs and upgrades segment underperformed by 18% Y-o-Y. The S$97mn shortage compared in FY16 to FY15 resulted from fiercer competition forcing the Group to receive lower revenue per vessel despite the higher number of vessels delivered. However, management guided that vessel maintenance is everlasting but cyclical. Apparently, demand has been trending up in recent years.
Ongoing cost optimisation and capacity renewal supports to pull through
- Training and reallocation of manpower from idled projects is expected to continue in FY17.
- Apart from saving costs from enhancement through multitasking of individual manpower, more importantly, SMM can gain flexibility to adapt to order flows once market rebounds.
- Furthermore, management views the replacement of two old yards, Shipyard Road Yard and Tuas Road Yard to Tuas Boulevard Yard (TBY), as a renewal of capacity. The two old yards with more than 60 years of history have gradually been incapable of meeting current engineering and mechanism requirements. Thereafter, TBY is ready for more customised requests.
Catalyst can be looked forward to:
- Ballast Water Management Convention, which will come into effect in September 2017, bodes a slew of installations of ballast water treatment systems in vessels as well as other related services in the near term. This will bring more business for repairs and upgrades segment moving forward.
- Floating LNG and related near-shore gas solutions could be a new business segment in 2017. SMM has disclosed that discussion with potential clients who are interested in Gravifloat technologies is proceeding.
- Floating production storage and offloading (FPSO), Floating storage and offloading (FSO) conversions and new-builds start to resume.
- We revise our forecasts upward to account for the better outlook in FY17, which translates into higher net income of S$130mn and EPS of 6.2 cents in FY17e, compared with our previous forecast of net income of S$95mn and EPS of 4.6 cents. Currently, SMM is trading at a 12-month blended forward PE of 25.4x.
- We upgrade our call to Reduce with a higher TP of S$1.58 (from S$0.87), based on a PER of 25.4x. This implies a downside of 31.8% from the last close price.