Sembcorp Marine - OCBC Investment 2015-10-23: Lowest quarterly profit since 4Q07

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine: Lowest quarterly profit since 4Q07

 Stopped recognition for five rigs

 Reversal of previous profits

 Downgrade to SELL

Sembcorp Marine (SMM) reported a 34.0% YoY drop in revenue to S$1.13b and a 75.7% fall in net profit to S$32.1m, the worst quarterly showing since 4Q07.
9M15 revenue met 72% of our full year estimates, but net profit only accounted for 52% due to a significant decline in gross profit margin to 8.0% in 3Q15 vs 16.5% in 2Q15.

Customer deferment requests for jackups resulted in suspension of revenue recognition for several contracts, and SMM also reversed some of the profit that was recognised earlier for a few units.

SMM stopped recognising the revenue for the two Perisai units and three Oro Negro units from Aug this year, due to difficulties on the customers' part. If payments are not obtained eventually, SMM can keep the 20% down payment and sell the units.
To be in line with its contractual rights, SMM reversed some of the profit for these five units in 3Q15, thereby impacting margins.
Meanwhile, the group also took a S$17.1m impairment for its stake in COSCO Corp Singapore, which released a profit warning yesterday. The interest is reflected under “other financial assets” in non-current assets.

After receiving S$2.9b orders to date, SMM's net order book stands at about S$11.6b, but about half of this relates to the Sete Brasil orders.
Meanwhile, SMM saw a recent 20% run-up in its share price from S$2.25 in early Oct to a peak of S$2.72 in mid Oct.
Though it has settled down to about S$2.54 currently, the rebound is likely unsustainable over the longer term due to the tough operating environment. Moreover, with the disappointing results, we cut our FY15 and FY16 estimates by 15-30%, such that our fair value estimate drops from S$2.20 to S$2.00.
Downgrade to SELL.

Low Pei Han OCBC Securities | http://www.ocbcresearch.com/ 2015-10-23

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