Sembcorp Marine - OCBC Investment 2016-02-16: Hit by Sete, other clients and Cosco

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SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine: Hit by Sete, other clients and Cosco 

• Net loss of S$536.9m in 4Q15 
• Weakening financial position 
• Outlook still lacks clarity 

First ever quarterly loss 

• Sembcorp Marine (SMM) reported an 8.2% YoY fall in revenue to S$1.33b and a net loss of S$536.9m in 4Q15, bringing full year net loss to S$289.7m, significantly below ours and the street’s expectations. 
• This was mainly due to 
  1. provision of S$329m for the Sete projects, 
  2. provision of S$280m for other rigs in case of prolonged deferment or possible cancellation in orders, and 
  3. S$192m share of loss from its 30% investment in Cosco Shipyard Group. 
• Net gearing jumps to 1.0x From a net cash position in 2Q14, the group’s net gearing has increased significantly to 1.0x as at end FY15. 
• With no payments from Sete Brasil and a deteriorating industry outlook, there are concerns on the group’s weakening financial position and cashflow situation ($989m operating cash outflow in FY15 due to higher working capital needs). 

Management expects to see reduction in working capital needs 

• With regards to this, management revealed that about S$2b of its $10.4b order book are attributable to drilling rigs which are on backended payment terms; the average upfront payment for these rigs is close to 30%. 
• The majority of its order book is based on progress payment terms. As such, the group believes this will minimise the need for fresh working capital. 
• In fact, SMM believes that its working capital needs have peaked, and expects to see a reduction in FY16. 

Still proposes a $0.02/share final dividend 

• Against such a backdrop, the group has cut its final dividend from S$0.08/share last year to S$0.02/share in 4Q15 (after cutting its interim dividend earlier), bringing its total dividend to S$0.06/share for FY15 vs. S$0.13/share in FY14. 
• Meanwhile, after receiving S$3.2b orders in FY15, SMM’s net order book stood at S$10.4b as at end FY15; excluding Sete Brasil drillships, the order book is about S$7.2b. 
• With the fall in book value, we tweak our estimates and our fair value estimate drops from $1.17 to S$1.08 (0.85x FY16F P/B). 
• Maintain SELL.

Low Pei Han OCBC Securities | http://www.ocbcresearch.com/ 2016-02-16

OCBC Securities SGX Stock Analyst Report SELL Maintain SELL 1.08 Down 1.17