Sembcorp Marine - DBS Research 2016-01-27: Rough sea ahead

Sembcorp Marine - DBS Research 2016-01-27: Rough sea ahead SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine - Rough sea ahead 


Reiterate FULLY VALUED on SMM with lower TP of S$1.35 

  • ... based on a lower 0.9x P/BV (from 1.2x P/BV) in view of the deteriorating situation in Brazil and potential impairment / provision ahead. 
  • The new TP implies 10% potential downside. Stock prices have been driven up by speculation of potential privatization by SCI lately, which is unjustifiable in our opinion. 
  • We believe the more likely scenario could be the injection of Keppel O&M into SMM. 
  • While dividend yield seems attractive over 5%, there is downside risk given the rising pressure to conserve cash. 
  • We will revisit our assumptions after FY15 results reporting on 15 Feb. 

Rough sea ahead. 

  • We expect more deferments and cancellations to come. 
  • SMM has seen a number of deferments from customers – Sete Brasil, Transocean, Oro Negro, Perisai, and the first cancellation by Marco Polo (MPM). The dispute with MPM will be a near-term drag and it appears challenging to dispose of the 95% completed terminated rig at good prices in the current environment. 
  • Meanwhile, the Brazilian saga remains an overhang with Sete Brasil’s financing issue still unresolved. 

Slow order momentum. 

  • New contract wins of S$3.2bn in 2015 is commendable in the current climate, driven by the two sizeable contracts to build a fixed platform and the world’s largest semi-submersible crane vessel. 
  • Nevertheless, current orderbook of S$11.6bn as at end-Sep15 is set to decline in anticipation of sluggish order flow. We believe rig orders are unlikely to make a comeback anytime soon given the supply glut amidst oil crisis. 


Valuation: 

  • Our target price of S$1.35 is based on 0.9x SMM’s FY16 P/BV, in anticipation of writedown ahead. This is also in line with AFC trough valuation. 


Key Risks to Our View: 

  • Key downside risks are sustained low oil prices which affect rig count and newbuilding activities, execution risks at protected markets especially Brazil and further deferments / cancellations. Upside risk could come from privatisation or M&A activities. 



Pei Hwa HO DBS Vickers | Janice CHUA DBS Vickers | http://www.dbsvickers.com/ 2016-01-27
DBS Vickers SGX Stock Analyst Report FULLY VALUED Downgrade FULLY VALUED 1.35 Down 1.85


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