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

2Q15: 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. 


RESULTS 


• Below expectations. 

  • 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. 

• An improved operating margin. 

  • 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%. 

• 2Q15’s turnover down 10% yoy on lower rig building revenue. 

  • 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. 

• Progress made on first four Sete Brasil drillships; arrears remain at S$160m. 

  • 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. 


STOCK IMPACT/EARNINGS REVISION 


• Cut 2015, 2016 and 2017 net profit forecasts by 13%, 7% and 2% respectively. 

  • 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. 


VALUATION/RECOMMENDATION 


• We tweak our target price from S$2.92 to S$2.91. 

  • 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


RISKS


  • A prolonged low oil price environment is the key risk. 
  • Our stock valuation is premised on US$70/bbl. 


SHARE PRICE CATALYSTS 


  • Oil price rebound and resumption in exploration activities.


(Nancy Wei, Foo Zhiwei)

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



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