Sembcorp Marine - OCBC Investment 2015-11-19: Mixed bag of news

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine: Mixed bag of news

 Marco Polo cancels contract

 Secures first FSO newbuilding

 Tough environment

Sembcorp Marine’s (SMM) customer, Marco Polo Drilling (I) Pte Ltd (subsidiary of Marco Polo Marine), has issued PPL Shipyard a notice of termination of a jack-up rig construction contract, following PPL’s alleged failure to comply with certain material contractual obligations. For instance, cracks have been found on all three legs of the new rig during two rounds of tests. As such, Marco Polo will not be taking delivery of the rig and will be seeking, among others, a refund of the initial amount of 10% of the contract price (approx. US$21.4m) together with interest.
PPL Shipyard stands by its ground PPL Shipyard has disagreed with the allegations and will terminate the contract and claim any amount due.
As the rig was scheduled for delivery in 4Q15, it should be more or less completed by now, and we foresee a potential profit reversal ahead (which perhaps should not be surprising given that the deferment/cancellation risk for this rig has been high for some time).
Recall that SMM had also reversed some of the profit for a few rigs in 3Q15 due to customers’ difficulties in making payments (two Perisai jack-up units and three Oro Negro units).

In a separate announcement, SMM said it will design and build a new floating, storage and offloading (FSO) vessel for a subsidiary of MODEC Inc. Scheduled for delivery in 1Q18, the FSO unit will be SMM’s first FSO newbuilding secured on a full turnkey project basis including engineering, procurement, construction and commissioning.
With the new integrated yard at Tuas, SMM is now able to undertake larger projects such as this.

Meanwhile, the operating environment for the rig market remains tough and contract deferrals and terminations are not a surprise to us.
As this current downturn looks likely to be protracted, we can hardly see signs of a pick-up for fabricators like SMM for now. Maintain SELL with S$2.00 fair value estimate.

Low Pei Han OCBC Securities | http://www.ocbcresearch.com/ 2015-11-19

OCBC Securities SGX Stock Analyst Report SELL Maintain SELL 2.00 Same 2.00