Sembcorp Marine - UOB Kay Hian 2016-02-16: 4Q15 ~ Bracing For More Provisions In 2016

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SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine (SMM SP) 4Q15: Bracing For More Provisions 

• In 2016 SMM saw a whopping loss of S$537m for 4Q15 on the back of a total provision of S$609m. 
• Of the provision, S$329m was related to Sete Brasil contracts while the remaining S$280m was for the other rigs. 
• SMM also booked a S$173m loss from associates, primarily from COSCO Shipyard Group. 
• We see the likelihood of asset impairment (which could be as much as S$550m) in 2016. 
• Net gearing had risen sharply to 1.1x as of end-15. 
• Maintain SELL and target price of S$0.88. 

RESULTS 

• First-ever quarterly loss of S$537m. 

• Results were worse than expected. Sembcorp Marine (SMM) posted a net loss of S$536.9m for 4Q15, resulting in a 2015 net loss of S$289.7m. 
• The losses were attributable to: 
  1. revenue reversals, 
  2. provisions, and 
  3. loss from associate COSCO Shipyard Group (CSG). 
• Revenue for 4Q15 fell by 8.2% from S$1.4b to S$1.3b on reversal of revenue, following the termination of the Marco Polo rig contract, customer deferment requests and restructuring. 
• A total provision of S$609m was made in 2015, of which S$329m was provision related to Sete Brasil contracts and S$280m was provision to other rigs. 
• CSG separately reported a 2015 loss of S$570m, which resulted in SMM reporting a S$173m net loss from associates. Excluding these provisions and losses from associates, 4Q15 would have seen a profit of S$99m. 
• SMM has declared a final DPS of 2 S cents. 
• Total DPS for 2015 amounts to 6 S cents, less than half of 2014’s 13 S cents. 

• Provision of S$609m was for supply chain costs and doubtful debts. 

• Of the S$609m in provisions made, S$329m was for Sete Brasil and S$280m for prolonged deferment/possible rig cancellations. 
• We understand from management that the bulk of these debts are provisions for supply chain costs, with the remainder for doubtful/bad debts. 
• No provisions were made for possible decline in asset values. 

• Net gearing up to 110%. 

• Net gearing spiked up from 67.5% in 9M15 to 109.5% in 4Q15, as SMM made a net loan drawdown of S$594m in 4Q15 to meet its cashflow requirements. The rise in net gearing is cause for concern as SMM is required to maintain a net gearing ratio below 175% to stay within its financial covenants. This leaves it with approximately S$1.6b debt headroom. SMM currently has two bonds (due 2021 and 2029) issued under Jurong Shipyard. 

STOCK IMPACT 

• More provisions still possible. 

• At this juncture, SMM opines that it has made sufficient provisions for contracts at risk. However, further provisions could be made if the situation worsens. This could take the form of: 
  1.  additional profit reversals due to further cancellations, and 
  2.  asset impairment of cancelled rigs, given that transactional rig prices have fallen near 60%. 
• In the case of a), we understand that provisions for Sete Brasil, North Atlantic Drilling and Marco Polo Drilling have been made. 
• While provisions for Oro Negro were made in 3Q15, more might be required given that Oro Negro in the near term is neither able to secure work for its remaining three rigs, nor acquire funds to meet its final instalment. 
• Other contracts that could be at risk but with no provisions made are two Perisai Pacific jack-up rigs, as well as the Odebrecht-Teekay FPSO for the Libra field. 
• For b), we estimate asset impairment of S$550m for rigs that get annexed by SMM. 

• Sete Brasil drillships project no longer net cash positive. 

• Management disclosed that the Sete Brasil project had swung from a net cash positive position to a small deficit position. They further added that provisions (of an undisclosed quantum) had been made for the deficit position. 

• Excluding Sete Brasil contracts, net orderbook of S$7.2b. 

• As of 31 Dec 15, SMM’s net orderbook was S$10.4b, which excluding Sete Brasil, falls to S$7.2b. 
• A majority of the S$10.4b orderbook are on progress payment terms, of which 20% are for drilling rigs with back-ended payment terms. 

EARNINGS REVISION 

• Reduce 2016-17 net profit forecasts by 7% and 8%. 

• We reduce our 2016-17 net profit forecasts to S$126m (-7%) and S$103m (-8%) respectively as we factor in higher interest expense from the markedly higher net gearing. 
• We introduce 2018 net profit forecast of S$127m. 

VALUATION/RECOMMENDATION 

• Maintain SELL and target price of S$0.88. 

• Our target price implies 0.95x 2016F P/B, assuming a further provision of S$550m from asset impairment. 
• Maintain SELL primarily due to two factors: 
  1. high risk of additional provisions, and 
  2. rising gearing, especially in the event of further cancellation, which might force a cash call. 
• A cash call by associate CSG would also exacerbate SMM’s weak financial position. 

RISKS 

• A prolonged low oil price environment is the key risk.

Nancy Wei UOB Kay Hian | Foo Zhiwei UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-16

SELL Maintain SELL 0.88 Same 0.88