DBS Vickers 2015-08-06: Sembcorp Marine - Navigating Rough Seas. Maintain HOLD.

Navigating Rough Seas 


Maintain HOLD; decent dividend yield. 

  • We reckon order momentum will likely lag any oil price recovery amid rig supply glut and keen competition. 
  • Nevertheless, SMM offers decent dividend yield of 4-5% on the back of 40% dividend payout. 

More deferments. 

  • Brazilian projects are likely to be pushed back as Petrobras has slashed its 5-year capex by 41% and production target by 30%. 
  • Transocean recently deferred delivery of the pair of drillships under construction at SMM's yard by two years. 
  • There could be more of such deferments which pose a risk to earnings, but this should be partially mitigated by compensation from customers. 

Slow order momentum. 

  • YTD win of S$1.4bn was driven by the sizeable contract with Heerema Offshore Services to build the world’s largest semi-submersible crane vessel. 
  • SMM’s orderbook had dwindled to S$10.9bn by end-Jun 15, from S$11.4bn in Dec-2015. 


Earnings Drivers: 


Declining orderbook. 

  • Order wins and orderbook trend are often the key leading indicators of rigbuilders’ share price and earnings. 
  • Singapore rigbuilders’ order flow has been slow, securing S$531m worth of new orders YTD or 11% of our full-year expectation of S$5bn (down from S$9.2bn in 2014). 
  • Based on existing capacity, SMM requires S$4-5bn worth of order replenishment every year. 
  • We expect new orders to be half of those levels in the coming two years amidst sector headwinds, a harbinger of declining orderbook and earnings ahead. 
  • SMM’s orderbook has dwindled to S$10.6bn by endMar-15, from S$11.4bn a quarter ago. This translates into a book-to-bill ratio of approximately 2.0x. (or 1.6x if stripping out Petrobras’ revenue recognition from 2017 onwards). 

Asset deflation underway. 

  • Post-GFC crisis, newbuild prices for drilling rigs tumbled 20-30% from 2008-2010. 
  • Prices have The 5-15% price gain over the past few years could all be given back, if not worse. 
  • In this downturn, China plays a bigger role in global rig market, garnering one-third of global orderbook. 
  • Over 90% of these contracts are built on speculation without back-to-back charters and on 5:95 balloon payment terms, making it vulnerable to cancellations. 
  • We expect fire sales to suppress rig prices as shipyards would be desperate to recoup their construction costs if ship owners walk away. 

Rig utilisation and dayrates remain under pressure. 

  • Low oil price adds fuel to fire, aggravating the already challenging rigbuilding market that is suffering from a massive order backlog and keen competition. 
  • New rig supply is projected to be 5-7% a year while rig demand is expected to contract by 3-5% y-o-y in 2015, before returning to positive territory in 2016. 
  • As a result, day rates and utilisation have fallen around 20% from June-2014 levels. It may get worse before it gets better. 
  • We believe gradual recovery in rig market towards 2016 will set the stage for rising newbuild demand thereafter. 

Pace of rigbuilding recovery. 

  • Pace of rigbuilding recovery is dependent on oil price rebound, retirement of old fleets and cancellations at Chinese yards. 
  • An oil price rebound above US$80/bbl will stimulate E&P activities and thus rig demand while rig attribution and cancellations will soothe the supply pressure and eventually bring the sector back to equilibrium. 



Valuation: 


  • Our SOTP target price of S$2.55 is based on 11x SMM’s FY15F earnings (excluding Cosco Shipyard Group, CSG), 8x CSG’s FY15F earnings and fair value of its 4.97% stake in Cosco Corp. (prev S$2.89)



Share Price Drivers: 


  • Recovery in oil prices. Rising oil prices could lift sentiment on rigbuilders, though it might lag behind the asset owners. 
  • We believe SMM would benefit if oil prices recover to at least above the $70/bbl level, which would trigger more offshore oil & gas capex spend. 
  • Order win momentum. Shipyards are orderbook driven. Strong order flow could push up the share price, as investors reward greater visibility on revenues and earnings. 
  • Restructuring of Sete Brasil. The successful restructuring of Brazil will allow Sete Brasil to get financing for its rigbuilding programme. This will eliminate an overhang on the rigbuilders. 



Key Risks: 


  • Sustained low oil price. Brent crude oil price below US$60/bbl would defer investments into deepwater, and higher cost of oilfield projects. 
  • Execution risks in protected market. Cost pressure, lack of skilled labour, potential project delays faced in emerging markets like Brazil is a lingering concern. 
  • Rig supply glut and competition. Slower order flow is expected as the market takes time to absorb almost 200 rigs scheduled for delivery in the next two years, representing > 20% of existing fleet. Competition is intensified with the low order backlog of Korean yards and emergence of Chinese shipyards in the offshore space. 



Analyst: HO Pei Hwa

Source: http://www.dbsvickers.com/


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