Sembcorp Marine - Maybank Kim Eng 2015-11-18: First contract cancellation

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - First contract cancellation

Marco Polo terminates jackup rig contract worth USD214.3m with SMM and seeks refund of its 10% deposit.
First formal contract cancellation for SMM. 2 rigs with Perisai and 3 with Oro Negro also at risk.
Reiterate SELL and SGD1.75 TP based on 0.55x EV/Backlog.

Marco Polo Marine Ltd said that it is terminating a USD214.3m jackup rig contract with PPL Shipyard, SMM”s subsidiary. The rig was ordered back in Feb 2014 during the rig building boom and due for delivery in end-2015.
Marco Polo claimed that PPL failed to comply with material contract obligations as cracks were found on all three legs of the rig. It is also seeking a refund of the 10% deposit (USD21.4m) it has paid.
SMM refuted Marco Polo’s allegations, saying that this is a repudiatory breach. SMM is terminating this contract on its end and claiming its amounts due.

We understand that Marco Polo has not operated a rig before and has not secured any charter for this intended jackup rig.
As at 9M15, its net gearing was 0.94x with cash of SGD15.5m. It would require huge funding if it were to take delivery of the rig, which would further stress its balance sheet.
This rig contract marks the first formal cancellation for SMM. Even if SMM did not breach its contract obligations, we worry that other weak clients may follow Marco Polo’s actions.
SMM has five other rigs (2 under Perisai, 3 under Oro Negro) that could also be at risk. Delivery dates for these units have been deferred for now.
SMM should have recognised a large part of this contract given that it was due for end-2015 delivery. If it cannot claim the amounts due or resell this unit, we believe that it may have to reverse the recognised profits.
Reiterate SELL and Street-low TP of SGD1.75 as we see no respite in the various pressures that it is facing.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-11-18

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.75 Same 1.75