Sembcorp Marine - DBS Research 2017-05-02: Order Wins Are Key Catalysts

Sembcorp Marine - DBS Vickers 2017-05-02: Order wins are key catalysts SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Order wins are key catalysts

  • 1Q17 bottom line aided by divestment gains.
  • EBIT margin would have been comparable if not for additional cost for a floater project.
  • Potential sizeable new orders are key re-rating catalysts. 
  • Maintain BUY; TP S$1.78.



Order wins are key catalysts 

  • BUY on weakness; TP of S$1.78, based on 1.5x FY17 P/BV. The sell-off post results is unwarranted. 
  • The additional cost incurred for a floater project that dragged 1Q17 earnings, could be recouped over the next few months. 
  • We continue to see rerating catalysts ahead for Sembcorp Marine (SMM) stemming from: 
    1. SMM as a pure play to ride the oil price recovery; 
    2. sizeable new orders for non-drilling solutions, in particular Gravifloat’s modularised LNG terminals; 
    3. conclusion of jackup sales; 
    4. reactivation of Sete’s projects; and 
    5. potential M&A play arising from a consolidation of Singapore yards.


Where we differ: more bullish on SMM’s contract wins. 

  • We expect sizeable contracts for LNG solutions to come through in next few months. Order wins, a critical leading indicator for recovery, is set to rise in 2017 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 in 2017. 
  • SMM has been reportedly in final talks with Chinese conglomerates Poly Group and GCL Group for LNG solutions, as well as Global LNG for a gigantic LNG vessel. This will buck the declining orderbook trend, which has dipped to S$4.02bn (excluding S$3.12bn Sete orders) in 1Q17.


Disposal of undelivered jackup rigs. 

  • SMM has seven outstanding jackup rig orders, which are all at advanced stages of construction. 
  • Besides the BOT Lease unit which will likely be delivered to its 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. The successful disposal of these rigs at breakeven price and above will free up capital and eliminate a key overhang on SMM.


Valuation

  • Our target price of S$1.78 is based on 1.5x FY17 P/BV, in line with 1.3SD below mean since 2009. 
  • SMM’s book value was already 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 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 from successful deliveries or vessel sales




HO Pei Hwa DBS Vickers | http://www.dbsvickers.com/ 2017-05-02
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.780 Same 1.780



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