RHB Research 2015-07-30: Sembcorp Marine - Brace For Dividend Cut. Maintain NEUTRAL.

Brace For Dividend Cut

  • 1H15 PATMI met 43% of our FY15 forecast as revenue disappointed with some drilling rigs’ deliveries deferred. 
  • Maintain NEUTRAL with a lower SGD2.60 TP (from SGD2.70, 4% downside) based on 12x blended FY15F-16F P/Es. 
  • Operating margin was encouraging, having ticked up to 12% in 2Q15 (1Q15: 10.6%). 
  • The half-year dividend was trimmed to 4 cents from 5 cents, prompting us to lower our yield expectations. 
  • We trim our FY15F/FY16F earnings by 8%/7%. 

 Rig building dips, repairs jump. 

  • Sembcorp Marine’s (SembMarine) 2Q15 revenue fell 7% QoQ as recognitions slowed following some delivery deferments. 
  • The outperforming segment was the repair business, which delivered a 66% QoQ and 11% YoY jump in revenue. 
  • The weak bottomline was largely due to a SGD5.4m exchange loss and a SGD16.9m currency forward marked-to-market charge in 2Q15, without which SembMarine would have met 47% of our original earnings forecast. 

 Encouraging uptick in operating margin. 

  • SembMarine’s operating margin rose to 12% in 2Q15 from 10.6% in 1Q15, which we believe was the combined result of higher contribution from higher-margin repair business and lower revenue from rig building, which tends to have lower margins. 
  • If the repair revenue momentum can be maintained, the company’s operating margin should be sustainable at this level. 

 Conserving cash. 

  • SembMarine trimmed its half-year dividend to 4 cents from 5 cents a year ago, citing lower earnings. 
  • We take this as a signal that the full-year dividend will also be cut, and we now expect 10/11/12- cent dividends for FY15-17, down from a flat 13 cents, based on the c.50% payout ratio range of the last three years. 
  • We believe the company will need the cash to pay down its debt and to fund the development of Phase 2 of the new Tuas Yard. 

 Trimming estimates. 

  • We lower our FY15-17 order win forecasts to SGD2.0bn/SGD2.5bn/SGD2.5bn from SGD2.0bn/SGD3.0bn/SGD4.0bn respectively, but raise our repair revenue assumptions by c.5%, with a net effect of trimming our FY15/FY16 earnings estimates by 8%/7% respectively. 
  • Maintain NEUTRAL with a lower SGD2.60 TP (from SGD2.70, 4% downside) based on 12x FY15-16F P/E. 
  • Key risks are order wins, revenue recognition, and rig delivery deferments. 

(Lee Yue Jer, CFA)

Source: http://www.rhbgroup.com/