Sembcorp Marine - CIMB Research 2015-12-09: When it rains, it pours

Sembcorp Marine - CIMB Research 2015-12-09: When it rains, it pours SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine - When it rains, it pours 

  • No re-rating catalysts in sight as SMM struggles with litigation, profit reversals and more deferral of deliveries in 4Q15 and 1H16. 
  • SMM’s reputation could be at stake, affecting future orders (if rig cycle returns) as attention is drawn to recent allegation about the quality of its proprietary jack-up legs. 
  • Maintain Reduce, with unchanged target price of S$1.88, still based on a CY17F P/E of 11x 

■ Reputation risk affects future orders 

  • SMM’s proprietary Baker Marine Pacific Class jack-up rigs are known as one of the widely accepted industry workhorses, dominating c. 15% of the global drilling rigs. 
  • Marco Polo’s recent allegation of cracks found on all three legs of the jack-up rig during a round of testing could be detrimental to its long-term reputation and future orders if the litigation outcome is in Marco Polo’s favour. 

■ Negative operating leverage 

  • Rigbuilding capex will likely remain anemic as the industry faces a supply glut, lower utilisation and rates over the next two years. 
  • We expect operating leverage to be stretched as SMM struggles to fill up sufficient work for its two mega yards in Singapore and Brazil. 
  • Depreciation had only begun in 2015 for Singapore integrated yard phase 1 (S$900m capex). 

■ Lower-margin contracts 

  • We expect future order wins to be of lower-margin, involving more specialized turnkey projects to replace the high-margin commoditized rigs. 
  • The S$3bn order wins in 2015 are of lower EBIT margin of high single digits to 10% in our estimate. 

■ Reiterate Reduce 

  • We are keeping our Reduce recommendation, given the uncertainty surrounding the Sete Brasil contracts (50% of its order book). 
  • Our worst-case scenario (all seven units are cancelled) shows possible 20-30% downside to our FY16-17 net profit estimates.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2015-12-09
CIMB Securities SGX Stock Analyst Report REDUCE MAINTAIN REDUCE 1.88 Same 1.88