Sembcorp Marine - DBS Research 2015-10-23: More deferments

Sembcorp Marine - Maybank Kim Eng 2015-10-23: Unabated pressure; maintain SELL SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine - More deferments 

  • 3Q15 earnings were way below on profit reversals, associate losses and impairment of its stake in Cosco. 
  • Rising number of deferments a worrying trend; bumpy earnings ahead. 
  • Trimmed FY15/16 PATMI by 25%/8%. 
  • Maintain Hold, TP lowered to S$2.32. 

3Q15 a big miss. 

  • 3Q15 net profit plunged 76% y-o-y and 71% q-o-q to a dismal S$32m in what looks like a kitchen-sink quarter as SMM reversed profit that had been recognised for the five deferred jackup rigs for Oro Negro and Perisai. EBIT margin shrunk 5.6ppts q-o-q to 6.6%. 
  • Ship repair revenue also disappointed, falling 17% y-o-y and 21% q-o-q. 
  • In addition, there were associate losses of S$24m (largely from Cosco) and S$17m impairment charge for mark-to-market adjustment of its stake in Cosco Corp. These were partially mitigated by tax credits of S$10m in the quarter. 
  • Net gearing rose from 0.5x as of endJun to 0.6x, a result of rising working capital needs to fund rigbuilding and capex deployed for the Tuas and Brazil yards. 

Key takeaways from briefing: 

  1. SMM is still in discussions with Oro Negro and Perisai on the delivery of the five jackups rigs, of which two are near completion. These projects are on 20%/80% payment terms. Hence, out of prudence, SMM has reversed the profits recognised for these projects, which will be written back upon delivery. This could lead to patchy earnings in the next 1-2 years in our view; 
  2. Construction progress for the Brazilian drillships remains slow pending Sete Brasil’s restructuring, and negotiations are still ongoing. 
  3. Order book inched up by S$0.7bn to S$11.6bn, thanks to the S$1.4bn fixed platform contract secured in the quarter. 

Maintain HOLD, TP cut to S$2.32. 

  • We trimmed our FY15/16F earnings by 25%/8% to reflect the one-off items in 3Q, project deferments and a further 6-month delay in the commencement of the remaining three units of Petrobras drillships. 
  • While we expect near term downside from a knee-jerk reaction to SMM’s share price arising from this negative earnings surprise, SMM is trading close to GFC lows of 1.5x P/Bv and supported by decent dividend yield of 4%. 
  • Maintain HOLD.

Pei Hwa Ho DBS Vickers | 2015-10-23
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.32 Down 2.48