CIMB Research 2015-07-29: Sembcorp Marine - Uphill battle. Maintain REDUCE.

Uphill battle 

  • SMM’s 2Q15 profit was 15% below our and consensus estimates due to lower revenue, higher interest costs and losses from Cosco. 
  • As a result, 1H15 earnings were at 44% of our FY15 forecast. 
  • SMM declared a lower interim DPS of S$0.04 (1H14: S$0.05). 
  • We cut our FY15-16 EPS forecasts by 9-19% but raise FY17 EPS by 9% as we push forward some revenue recognition. 
  • This reduces our target price, still based on 11x CY16 P/E. 
  • Order book stood at S$10.9bn, with YTD win of S$1.35bn. 
  • SMM faces several headwinds: 
    1. low yard utilisation in Brazil and Singapore, 
    2. higher net gearing to finance working capital of projects with delayed delivery/ payment, and 
    3. potential order cancellations. 
  • We maintain our Reduce call. 
  • TP: S$2.40 (prev S$2.52)

Rig building revenue could trend lower 

  • Higher qoq EBIT margin of 12% was the only positive from SMM’s 2Q15 results, thanks to higher ship repair revenue. But this may also be short-lived as repair volumes tend to be lumpy. 
  • 2Q15 rig building revenue shrank 17% qoq and 29% yoy to S$623m, contributing only 51% to total revenue (FY14: 64%). 
  • Semi-submersible revenue plunged 57% qoq with no major delivery in 2Q15 and significant depletion of order backlog. 
  • Only three projects remain – Helix semi-well intervention, Seadrill’s CS60 and Prosafe semi accommodation rig. 
  • We expect rig-building revenue to be lower in 2H15 as we believe SMM is in discussion with ‘a handful’ of jack-up rig customers –including Mexican Oreo Negro (3 rigs), Perisai Petrolem (1) and Marco Polo (1)– to delay delivery, which could push revenue recognition to the right. 
  • The possibility of zero jack-up rig delivery in 2H15 is high. 

Same story for Sete Brasil 

  • SMM recognised S$232m of drillship revenue, slightly higher than 1Q15’s S$216m. Sete Brasil projects are still cashflow positive. 
  • SMM will scale down construction or stop work if the project cashflow buffer is exhausted. 

Capex and working capital led to higher net gearing 

  • Net gearing rose to 0.5x from 0.2x in 2014, mainly to finance the Brazilian and Singapore yards (phase 1 & 2). SMM has spent S$776m on these two yards in 1H15 (S$2.8bn since 2010). 
  • Depreciation had only begun for Singapore phase 1 (S$900m). Capex should taper off in 2016 but SMM could remain in net gearing position given the delayed payments and delivery rescheduling by Sete Brasil and others. 

(LIM Siew Khee)

Source: http://research.itradecimb.com/