Sembcorp Marine (SMM SP) - UOB Kay Hian 2017-10-05: No Bottom Line Impact From Oro Negro Termination

Sembcorp Marine (SMM SP) - UOB Kay Hian 2017-10-05: No Bottom Line Impact From Oro Negro Termination SEMBCORP MARINE LTD S51.SI

Sembcorp Marine (SMM SP) - No Bottom Line Impact From Oro Negro Termination

  • The recent termination of the Oro Negro contracts should have no impact on Sembcorp Marine (SMM)’s bottom line in the coming quarters. 
  • As a re-iteration, profits recognised on the rigs were reversed out in 3Q15 and revenue recognition was halted. With uncovered cash costs on each rig representing a c.35% discount to original contract value, it is likely that no further write-downs are needed. 
  • Maintain HOLD with target price unchanged at S$1.77. Entry price: S$1.60.


WHAT’S NEW


Terminates contract with Oro Negro. 

  • Sembcorp Marine (SMM) announced that it had terminated the contract for three rigs with Oro Negro on 4 Oct 17. The termination was based on terms of the deferment agreements between PPL Shipyard and Oro Negro.


STOCK IMPACT


Profits reversed out in 3Q15 for Oro Negro contracts. 

  • SMM had in its 3Q15 results, reversed out the profits on 5 rig building contracts: 2x from Perisai Petroleum, and 3x from Oro Negro. In addition, SMM had prudently stopped revenue recognition on these projects. As such, we do not expect any bottom line impact from the contract termination.
  • The same could be said for the Perisai contract termination, announced in end-Aug 17.

Uncovered cash cost low enough to not warrant further write-downs. 

  • Each Oro Negro rig is estimated to have an uncovered cash cost of US$136m. This reflects a 35% discount from its original contract value of US$209m per rig. SMM may have further written down the rig value when it provided another S$280m for its problematic rig contracts in 4Q15. 

SMM could transact its rigs without taking further losses: 

  • Recent transactions see discounts to the original contract price of 20-45%, with Keppel recently transacting its Transocean rigs for an implied c.US$170m per rig, a 21% discount to original contract price.


EARNINGS REVISION 


No earnings revision. 



VALUATION/RECOMMENDATION


Maintain HOLD with an unchanged target price of S$1.77. 

  • Our target price was earlier revised to S$1.77, pegged to a 1.3x 1-year forward P/B benchmark. 
  • Despite the improving oil price outlook, capital budgets for offshore production contracts remain subdued and challenging to bid for. Contract wins might fall short of the annual S$4b-5b in contract wins the new yard was designed for. 
  • With no visible earnings catalyst, it remains a trading play to oil price and we maintain our HOLD rating. Entry price: S$1.60.


RISKS 

  • Higher-than-expected contract wins.




Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-05
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.770 Same 1.770



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