UOB Kay Hian Research 2015-07-30: Sembcorp Marine - Lower-than-expected Earnings On Losses From Mark-To-Market, Forex And Associates.

2Q15 net profit was 16% below our expectation on mark-to-market, forex and associates’ losses.
However, 2Q15 operating margin of 12.2% was an improvement vs 1Q15’s 10.6%.
We cut our 2015, 2016 and 2017 net profit forecasts by 13%, 7% and 2% respectively on lower drillship-building revenue recognition, as drillship deliveries have shifted.
Interim DPS is cut to 4 S cents from 5 S cents previously.
We lower our target price by 1 cent to S$2.91.
Maintain HOLD with entry price of S$2.50.

Sembcorp Marine (SMM) posted a net profit of S$109.2m (-17% yoy) for 2Q15 and S$215.1m (-15% yoy) for 1H15.
1H15’s net profit was 16% below our forecast of S$256m.
We attribute 2Q15’s poor performance to:
1. mark-to-market of forex forward contracts and forex losses of S$16.9m and S$5.4m respectively, and
2. associates’ losses of S$2.6m due to COSCO Shipyard Group’s (CSG) losses.
Interim DPS is cut to 4 S cents from 5 S cents previously.

2Q15’s operating margin was 12.2%, an improvement from 1Q15’s 10.6% (4Q14: 16.1%, 3Q14: 10.0%, 2Q14: 11.5%, 1Q14: 11.1%).
Excluding the losses from mark-to-market forex forward contracts and forex totalling S$22.3m, operating margin would have been a decent 14.0%.

This was offset by higher revenue recognition for offshore and conversion projects and higher revenue for shiprepair business.
Current orderbook stands at S$10.9b (1Q15: S$10.6b).
It includes contract wins ytd of S$1.35b, the largest of which is the engineering and construction contract for the DP3 new semi-submersible crane vessel for Heerema Offshore Services.
We maintain our contract win forecasts for 2015-17 at S$2.5b, S$3.5b and S$5.0b respectively.

Payments from Sete Brasil continue to remain elusive since Nov 14, with arrears remaining unchanged from 1Q15 at S$160m.
The entire project remains net cash positive.
Management reported that construction progress for the four drillships was about 82%, 74%, 60% and 30% (1Q15: 82%, 66%, 51% and 22%).
Ytd, S$448m in revenue has been recognised from the drillships under construction.
Management continues to explore all options on a resolution with Sete Brasil, including slowing down construction.

We reduce our 2015-17 earnings to S$445m, S$450 and S$460m respectively.
The earnings reduction arises mainly from a change in revenue recognition on the three remaining Sete Brasil drillships and Transocean’s drillships.
For Sete Brasil, we push back revenue recognition by 10 months on average, while for Transocean we defer recognition by two years.
We also reduce associates & JV contributions owing to poor earnings from CSG going forward.

For the Singapore rig builders, SMM’s historical P/B valuations provide a good valuation benchmark for large-cap shipyards involved in offshore heavy engineering.
We use SMM’s historical 1-year forward P/B as the base for valuing large-cap offshore-heavy-engineering stocks.
Traditionally, there is a correlation between P/B valuation and oil prices.
We use adjusted regression analysis to set 1-year P/B stock valuations at different oil price levels.
US$70/bbl is our base case for Brent crude oil price.
Bloomberg’s mean consensus forecasts for average Brent oil prices are US$66.50/bbl in 4Q15 and US$70.94/bbl in 2016.
At U$70/bbl for Brent oil price, we estimate 2.1x 2016F P/B for large offshoreheavy-engineering shipyards.
However, in today’s climate, we apply a 15% discount for SMM’s valuation in view of its greater risks in Brazil.
Thus, our target price of S$2.91 for the stock is premised on 1.8x 2016F P/B.

(Nancy Wei, Foo Zhiwei)

Source: http://research.uobkayhian.com/

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