Sembcorp Marine - DBS Research 2017-07-21: New Orders Deferred, Not Deterred

Sembcorp Marine - DBS Vickers 2017-07-21: New Orders Deferred, Not Deterred SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - New Orders Deferred, Not Deterred

  • New orders were deferred, not deterred.
  • Remain positive on Brent recovery in 2H.
  • Lifting SMM’s valuation from 1.5x to 1.8x P/Bv, in line with 1SD below mean.



Maintain BUY; TP raised to S$2.30.

  • Maintain BUY; TP raised to S$2.30, based on higher valuation peg of 1.8x FY17 P/BV (1SD below mean) in anticipation of stronger order flow ahead. 
  • SMM’s underperformance since Mar – given uninspiring 1Q17 results, softened oil prices, and slow contract flow – presents a buying opportunity. We continue to see rerating catalysts stemming from: 
    1. SMM as a pure play to ride the oil-price recovery towards 2H; 
    2. sizeable new orders for non-drilling solutions, in particular Gravifloat’s modularised LNG terminals; 
    3. the conclusion of jackup sales; 
    4. the reactivation of Sete’s projects; and 
    5. SMM being a 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 6 months. Order wins, a critical leading indicator for recovery, is set to rise next year with several modularised LNG terminal contracts in the pipeline, each ranging from S$200m- 300m (for importing LNG terminals) to c.S$1bn (for exporting LNG terminals). We expect these to drive SMM’s order wins to the S$2bn mark. 
  • 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 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$ 2.30 is based on 1.8x FY17 P/BV, in line with 1SD below mean since 2004. 
  • 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/ 2017-07-21
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.30 Up 1.780



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