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

Sembcorp Marine - Maybank Kim Eng 2015-10-23: Unabated pressure; maintain SELL 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. 

What’s New 

  • 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. 

What’s Our View 

  • 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