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
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http://research.itradecimb.com/
2015-12-09
CIMB Securities
SGX Stock
Analyst Report
1.88
Same
1.88
