Sembcorp Marine - Maybank Kim Eng 2016-01-19: Still Can’t See The Ocean Floor

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SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine (SMM SP) - Still Can’t See The Ocean Floor 

No visibility of bottom 

• Even after accounting for substantial writedowns, we do not have confidence that we have accounted for the worst. We have yet to price in: 
  1. any impairment to its SGD1b investment in its Brazil yard; and 
  2. two Transocean drillships which may be cancelled after two years of deferment. These are on 5/95 payment terms. 
• We cut FY16-17 EPS by 45-53% and dividend payouts to c.30%. 
• Maintain SELL with TP dropped from SGD1.53 to SGD1.00, now based on adjusted NTA (1x FY16 P/BV previously). 
• With the stock trading below its book value, a privatisation by SCI or Temasek looks increasingly plausible. 

Do not expect any rig orders 

• We cut FY16/17 order wins from SGD2.5b/3.7b to SGD1.6b/year. In our view, there is no need for new rigs even if oil rebounds to USD50-60/bbl due to rig oversupply. 
• SMM did not clinch any drilling-rig orders in FY15. We expect further droughts in FY16-17, with contract wins expected to come solely from offshore and conversion jobs. 

Up to SGD0.9b of asset writedowns 

• We have removed revenue recognition of rigs at high risk of order cancellation. These include Sete Brasil rigs. 
• In all, we cut FY16-17 EPS by 45-53%. 
• We also think that SMM may need to mark down its asset values by up to SGD0.9b to current depressed market values. This figure has yet to include any impairment charges for its SGD1b yard investment in Brazil. 

Privatisation possible 

• We highlighted the possibility of SMM’s privatisation in an earlier report. This looks increasingly plausible, now that SMM is trading below book. But we keep our fundamental SELL on the stock with our TP cut from SGD1.53 to SGD1.00 after accounting for asset writedowns.

Swing Factors 

Upside 

• Parent company Sembcorp Industries decides to privatise SMM at a premium. 
• Sete Brasil manages to secure financing to pay SMM its dues and expresses confidence that its contracts will be intact. 
• SMM manages to sell Marco Polo rig and North Atlantic drilling rigs for huge profits like when it did during GFC. 

Downside 

• Sete Brasil cancels orders for seven drillships worth USD5.6b and cannot pay dues. 
• More contract cancellations requiring write-down of its SGD11.6b order book as of 3Q15. 
• Order drought or price sacrifices to secure orders in 2016.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-01-19

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.00 Down 1.53