Sembcorp Marine - DBS Research 2015-12-02: Slipping into the red

Sembcorp Marine - DBS Research 2015-11-18: Hit by contract cancellation SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine - Slipping into the red 

  • Guiding for a net loss in 4Q15 
  • Prudent provisions for potential deferments / cancellations 
  • To get worse before it gets better; downside risk to DPS 
  • Downgrade to FULLY VALUED; TP cut to S$1.85 

Warns for losses in 4Q15. 

  • SMM has issued profit warnings that it expects a net loss for 4Q15, resulting in a significant y-o-y profit decline in FY15. The challenging operating environment and project deferments were cited as key culprits. 
  • Separately, regarding the purported termination of the jackup rig contract with Marco Polo, SMM has demanded the latter to pay the overdue second disbursement of 10% of the contract price (US$21.43m) that has been deferred twice, as well as agreed interests. 

To get worse before it gets better. 

  • We reckon the potential losses in 4Q15 are attributable to profit reversal and impairment for the 95% completed Marco Polo unit as well as prudent provisions for the higher risks of newbuild projects without back-to-back charter contracts. 
  • There may be more bad news to come - deferments, cancellations, asset deflation etc - in view of the prolonged oil crisis. Newbuild rig orders are unlikely to make a comeback any time soon as the rig supply glut will take time to be absorbed. 
  • The restructuring progress of SMM’s single largest Brazilian customer Sete Brasil, who accounts for > 40% of its orderbook, also appears slow and Petrobras’ scandal continues to be an overhang. 

Downgrade to FULLY VALUED. 

  • We are leaving our forecasts unchanged for now pending more colour on the provisions and delivery schedule. There is also downside risk to our existing DPS forecasts given the decline in earnings and rising gearing levels. 
  • We cut our TP to S$1.85 based on a lower 1.2x P/BV (from 1.5x P/BV) on the back of lower ROEs that is projected to fall into the low teens; the lower TP implies 11% potential downside. 
  • Downgrade to FULLY VALUED.

Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2015-12-02
DBS Vickers SGX Stock Analyst Report FULLY VALUED Downgrade HOLD 1.85 Down 2.32