Sembcorp Marine - Maybank Kim Eng 2015-12-02: Expect losses in 4Q15

Sembcorp Marine - Maybank Kim Eng 2015-12-02: Expect losses in 4Q15 SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine (SMM SP) - Expect losses in 4Q15  

Warns of net loss in 4Q15 

  • SMM warned that it will have a net loss in 4Q15 and FY15 net profit will be significantly lower YoY when it reports on 15 Feb 2016. It attributes the expected 4Q loss to a challenging operating environment and customers deferring or seeking to defer their rig orders. 
  • We cut FY15E/16E EPS by 33%/6% as we factor in more deferrals and importantly, an assumed provision of SGD70m in 4Q15. 
  • Reiterate SELL and TP of SGD1.75 as we continue to expect weak order wins, cancellation risks and unresolved payment issues from Sete Brasil to weigh on the stock. 

Could set aside provisions for Marco Polo rig 

  • 4Q15 is not yet over, but SMM is already sure that it will make a loss. Other than weaker revenue recognition, we suspect that it may be required to set aside significant provisions for the Marco Polo jackup rig that the latter seeks to terminate. 
  • We estimate that SGD35m of EBIT has been recognised. 

May take opportunity to kitchen sink more losses 

  • But the actual provision may be higher than the SGD35m EBIT recognised as it may also need to provide for 
    1. legal cost and other losses, 
    2. possible refund of the 10% deposit that Marco Polo has paid and 
    3. impairment losses if assessed market value of the asset is less than the contract value of USD214m. 
  • The auditors may push for maximum provision as there may not be an easily assessable market value for the rig. 
  • SMM may also take the opportunity to kitchen sink more losses in 4Q15. We thus assume an additional provision of SGD35m in our forecasts, bringing total provision to SGD70m in 4Q15. This brings our 4Q15 PATMI forecast from SGD99m to a net loss of SGD12.6m. 

6-33% cut in FY15-16E EPS. Reiterate SELL 

  • We cut FY15E/16E EPS by 33%/6% based on our assumed provisions and more delivery deferrals. We now assume no final dividends for FY15E. 
  • Reiterate SELL and TP of SGD1.75, based on 0.55x EV/Backlog. 
  • Upside risk from potential privatisation of SMM by SCI.

Yeak Chee Keong CFA Maybank Kim Eng | 2015-12-02
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.75 Same 1.75