Sembcorp Marine - OCBC Securities 2015-09-10: Weathering the storm.


Sembcorp Marine: Weathering the storm 

 Oil physical market remains weak 
 Sete rigs continue to be in focus 
 Lower fair value to S$2.20 

Short term crude oil prices under the mercy of traders 

  • Crude oil prices have been volatile of late, with the WTI falling ~35% from end Jun to hit a low of US$38 in the last week of Aug, and recovering about 20% to the current level of about US$45/bbl, as we saw a significant covering of short positions by oil traders after oil tanked to a six-year low. 
  • While short term oil prices have increasingly been under the mercy of traders, longer term prices are still tied to the physical market. 

A question of timing 

  • Over the longer term, we expect oil prices to recover, and by extension the offshore sector as well. The question, however, is when. Considering the supply of oil is likely to remain elevated with OPEC’s market share strategy, and demand is likely to remain weak due to lacklustre growth by major economies, oil prices may indeed remain lower for longer. 

Incorporated delay for Sete rigs 

  • For Sembcorp Marine, the group still has a S$10.9b net order book, but about half of this relates to Sete Brasil orders. There is still a lack of clarity when Sete would resume its payments, and there is increasing concern over the viability of the last few rigs. 
  • We have previously incorporated a six-month delay for the Sete rigs, and should the last two units be axed, our FY15 - 16 estimates will not be impacted. 

Lower fair value to S$2.20 

  • OCBC Treasury Research and Strategy recently lowered its forecasts for oil prices (WTI: US$45- 50 for end 2015 and US$60 for 2016; Brent: US$50-55 for end 2015 and US$70 for 2016), and we lower our P/E for the O&M segment exCosco in our SOTP valuation from 12x to 10x (1 s.d below historical average), such that our fair value estimate drops from S$2.62 to S$2.20. 
  • With operating margin assumptions of 11.5- 11.9% for FY15-16, we think our earnings estimates are relatively conservative for now. 
  • Maintain HOLD.

Low Pei Han | OCBC Securities 2015-09-10
HOLD Maintain HOLD 2.20 Down 2.62