Sembcorp Marine - DBS Research 2016-02-16: Prolonged downturn

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Prolonged downturn

Larger than expected losses in 4Q15 on S$600m provisions
Declared 2 Scts final DPS; full year DPS of 6 Scts is 54% lower than 13 Scts p.a. in the last 3 years
Net gearing rose to 1.0x; capex to moderate from 2016 onwards

...based on 1.0x FY16 P/B, reflecting the fall in book value post provisions. SMM’s share price has recently been supported by speculation of potential privatisation by SCI, which is unlikely in our opinion.
We believe the more likely scenario would be the merger of Keppel O&M and SMM.
Dividend yield is expected to moderate from 4% in FY15 to 3% in FY16-17 on declining earnings.
We cut FY16-17F earnings by 33-37% after pushing back the delivery timelines of Sete Brasil projects and lowering EBIT margins by up to 1.4ppt.

While SMM may have made adequate provisions of S$609m for 75% of the outstanding rig orders in FY15, additional provisions could be required if the operating environment deteriorates further especially in Brazil, which accounts for 31% of SMM’s orderbook.Deferment and cancellation risks remain prevalent in the current climate.
The delivery of the deferred units (for Sete, Transocean, Oro Negro, Perisai, Seadrill) will have to come through to improve operating cash flow and lower its high net gearing of 1.0x.

Orderbook declined to S$10.4 bn as of end Dec-2015, from S$11.6bn a quarter ago and is set on a declining trend in anticipation of sluggish order flow.
We believe rig orders are unlikely to make a comeback anytime soon given the supply glut amid the oil crisis.
New contract wins of S$3.2bn in 2015 were from two sizeable contracts to build a fixed platform and the world’s largest semi-submersible crane vessel.
We expect SMM to secure S$2.5bn new orders in 2016.

Our target price of S$1.24 is based on 1.0x FY16 P/B, which is justifiable as ROE is only 10%.
The book value has been written down after the massive S$609m provisions in FY15.

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 as well as write-back of the provisions with successful deliveries or vessel sales.

Pei Hwa HO DBS Vickers | Janice CHUA DBS Vickers | http://www.dbsvickers.com/ 2016-02-16

DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 1.24 Down 1.35