Sembcorp Marine - Maybank Kim Eng 2016-02-16: Not the end of its woes

Sembcorp Marine - Maybank Kim Eng 2016-02-16: Not the end of its woes SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine (SMM SP) - Not the end of its woes 

Results missed but not a surprise. Maintain SELL. 

  • 4Q15’s net loss of SGD537m wiped out 9M15’s SGD247m profit, dragging FY15 to a net loss of SGD290m. This was largely due to SGD609m of provisions and SGD192m of associate loss for SMM’s 30% stake in Cosco Shipyard Group. 
  • This is not a big shock to us given its profit warning on 1 Dec 2015, Keppel’s (SELL, TP SGD4.24) SGD230m provision and our estimate of up to SGD866m of writedowns in an earlier report. 
  • What surprised us was SMM’s 2.0 cts of final DPS despite the massive loss, SGD1.9b of negative FCF and spike in net gearing from 0.64x in 3Q15 to 1.0x at end-FY15. 
  • Cut FY16-17E EPS by 4-6% largely on higher interest expense. 
  • Maintain SELL and SGD1.00 TP which is based on its NTA after adjusting for our assessment of potential writedowns. 
  • Implied FY16E P/BV is 0.8x. 

SGD609m of provision may not mark the end 

  • Of the SGD609m provision, SGD329m is related to Sete Brasil and SGD280m for other rigs. 
  • We previously estimated SGD381m of writedowns for Sete Brasil and SGD486 for other rigs. We see risk of further mark downs if market conditions deteriorate further, leading to more contract cancellations or lower asset prices. 
  • SMM admitted to low visibility on Sete Brasil’s fate and challenging industry conditions which support our negative view. 

Core operations uninspiring 

  • Core operations were not inspiring. Stripping out provisions, 4Q15 op. margin would be only 7.5% (4Q14: 16.1%, 3Q15: 6.6%). 
  • In addition, ship repair remained lacklustre with FY15 revenue dipping by 10% YoY to SGD557m, below its SGD600-800m range since 2006. 

Risk-return remains negatively skewed 

  • We think that risk-reward is still unfavourable as we see a sustained order drought over FY16-17 and increasing risk of order cancellations that will lead to more asset writedowns. 
  • We also do not rule out a rights issue. 
  • Upside risks to our view could come from 
    1. potential privatisation of SMM, 
    2. Sete Brasil securing sufficient funds to take delivery and 
    3. SMM finding alternative buyers at good prices.

Yeak Chee Keong CFA Maybank Kim Eng | 2016-02-16
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