Sembcorp Marine - CIMB Research 2015-10-23: Short-term pain, long-term gain unsure

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Short-term pain, long-term gain unsure

3Q15 core net profit of S$49m was 50%/60% below our/consensus forecast due to weak rig-building revenue recognition and reversal of profit for five jack-up rigs.
Plunge in the share price of associate Cosco resulted in S$17m impairment made on assets held for sale as well as S$24m losses shared in associates.
3Q15 EBIT margin was 6.6% (1H15: 11.4%) due to profits reversed for five jack-up rigs which had stopped construction since Aug 15.
We cut our FY15-16 EPS by 2-12% and target price to S$2.03, as we roll forward to CY17 valuation, still based on 11x P/E (-1 s.d. of historical average).

Jack-up revenue plunged Rig-building revenue dropped 22% qoq to S$485m as SMM has slowed down the construction of most of its proprietary design (PC400) jack-up rigs due to deferral of deliveries to Perisai Petroleum (two units) and Oreo Negro (three units).
We estimate that SMM could have recognised less than S$200m in jack-up rig revenue in 3Q15 as it has now limited its disclosure of rig-building revenue by segment.

EBIT margin of 6.6% in 3Q15 was the lowest since 2007. Firstly, it was due to the minimal construction revenue recognised for its proprietary jack-ups. Secondly, SMM also reversed the profits that were associated to the five rigs mentioned above, aligning to its contractual rights, in case of cancellation.
9M15 EBIT margin stood at 9.9% and management's guidance of 10-13% remains.

According to Rigzone, two out of the three Oreo Negro rigs will be deferred till Feb 16 while the third unit till Dec 16. Perisai’s units are due for delivery in Mar and Jul 16. If payments were not made by these dates, SMM could pull the plug to resume ownership of these rigs and look for new owners.
SMM had in 2009/10 netted EBIT margin as high as 30% from resumption of margin on cancelled rigs. However, it is too presumptuous and bullish to assume SMM would be able to terminate the contracts and sell the rigs as negotiations for deferrals are ongoing.

SMM made a S$17m provision for impairment on its investment in Cosco Corp, trading of whose shares have been suspended since Aug 15.
In addition, it also incurred a S$24m share of Cosco Corp’s shipyard group’s loss. Cosco Corp has issued a profit warning for its 3Q15 results, stating that it will make a net loss due to weak oil prices, slump in the shipbuilding market, and pressure from languid dry-bulk shipping.

With non-payments from various customers, SMM’s working capital is stretched with a negative operating cashflow of S$408m as at 9M15. Net gearing worsened from 0.5x in 2Q15 to 0.67x in 3Q15.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2015-10-23

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