Sembcorp Marine - CIMB Research 2016-02-16: Charting new trough

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Charting new trough

It pained us to go through SMM’s 4Q15 net loss of S$537m. We were bracing for a profit of S$223m in FY15 while consensus expected S$237m.
S$609m of provisions were made: S$ $329m for Sete Brasil, S$280m for North Atlantic and Marco Polo. There was also S$150m associate loss from Cosco.

A final DPS of S$0.02 was declared. Net gearing at 1.1x.
We cut our EPS by 46-66% and lower our target price to S$0.90, now based on 0.7x P/BV.

4Q15 revenue of S$1.3bn (+17% qoq, -8% yoy) was not as ugly as its profit, comprising S$567m from rig building, S$582m offshore conversion/fixed platform and S$160m ship repair.
Non-Sete Brasil order book stood at S$7.2bn.

The S$329m provisions made for Sete Brasil took into account the full extent of SMM’s exposure to the contracts, including uncollected amounts, construction progress, suppliers’ liability and low-oil environment with risks for cancellation and deferment.
The two FPSO topsides for Petrobras, P68,P71 (US$674m) are not affected with steady monthly progressive payments. Deliveries are shifted to 2018/19 from 2016/17.

SMM also took a hit of S$280m of inventory write-down, reversal of profit and doubtful debts for North Atlantic semi-sub, Marco Polo JU as well as three JUs built on speculation (less than 50% completed).
Including three units from Oro Negro (all technically accepted) and two from Perisai (1 technically accepted and 1 still on-going), SMM could end up with 10 rigs in its yards, with potential for super profits if rigs are sold.

SMM’s associate, Cosco reported a net loss of S$484m in 4Q15 and S$570m in FY15.
It provided for S$380m of doubtful debts for drillship modules and FPSO for Brazilian customers and wrote off S$309m of inventories for Deepwater Drillship project.
It is expecting FY16 to be a challenging year. We see Cosco’s losses as a de-rating catalyst.

Only S$2bn of its orders are with back-ended payment terms, requiring working capital in FY16-18 (S$1.4bn for Transocean drillships, c.S$350m for Helix intervention rig, and c.S$240m for Japan Drilling JU).
The S$300m collection for Prosafe’s semi-sub accom. rig in Jan and upcoming deliveries of CJ70 for Noble Hercules JU will also ease cashflow.
Net gearing should improve to c.0.8x by end-16 as capex tapers.
It does not rule out equity issuance but stressed that working capital has peaked (read: not urgent).

We cut our EPS by 46-66% to reflect lower margin (8% EBIT) and orders (S$1.5bn p.a.).
We now peg SMM at 0.7x P/BV (average 7% ROE).
Bad news including risky contracts, Sete Brasil issues, high net gearing may have been factored in, but we would wait for the dust to settle and other indicators (oil price, margins and new orders) to turn positive.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-02-16

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