Sembcorp Marine - CIMB Research 2016-04-28: Negotiating its course

Sembcorp Marine - CIMB Research 2016-04-28: Negotiating its course SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine - Negotiating its course 

  • 1Q16 core net profit of S$46m (-57% yoy, -54% qoq) was in line with our expectations at 25% of our FY16 forecast, and 21% of consensus. 
  • Net profit of S$55m included S$9m EI gain due to increased stake in Gravifloat. Share of associate (Cosco) surprised on the upside after three quarters of losses. 
  • Valuation is steep at 28x CY17 P/E vs. 37% earnings deterioration and 1.3x CY16 P/BV vs. ROE of 7.8%. Risk of rights issue could also be a key de-rating catalyst. 
  • Maintain Reduce and target price of S$0.90, based on 0.7x CY17 P/BV. 

■ Weakness in volume expected, Cosco surprised on the upside 

  • No surprise in SMM’s 1Q16 revenue of S$918m (-30% yoy, -31% qoq) on the back of deferrals or rig-building projects announced in 2015. Accordingly, rigs & floaters’ revenue was down by 43% yoy to S$540m. 
  • The key surprise was a S$2.6m share of profit from associate (Cosco) after posting three quarters of losses in FY15. 
  • Cosco’s results will be announced on 12 May 2016. We believe the lack of significant provision could be the reason for the improvement. 

■ Weak operating margin, delivery of projects critical 

  • 1Q16 op. margin of 7.8% was slightly below our expected 8.2% (4Q15 op. margin ex provision: 7.4%). 
  • Management hinted at a qoq improvement, with delivery of projects as follows: 1x CJ70 JU to Noble, 2x FPSO conversions to Modec and Libra, respectively, as well as offshore platform to Det norske. 
  • Net gearing worsened to 1.15x (4Q15: 1.09x) but this could level off by end-16 with the final payments from project deliveries and ongoing projects’ progressive payments amounting to S$1.5bn-2bn. 

■ Long-drawn battle to untie the Brazilian knot 

  • We see SMM’s recent arbitration against potentially bankrupt subsidiaries of Sete Brasil (each drillship is tied to a SPV) as a formality. The chances of recovering compensation from a cash-strapped Sete Brasil is low, in our view. 
  • The final resolution of the issue will revert to Petrobras, which is still battling with the corruption scandal of operation Car Wash. We believe SMM’s hope to resume ownership of uncompleted drillships could be complicated by the significant (S$2.6bn) progressive payments already received. 

■ Hercules rig switched from low to high risk 

  • Negotiations to take delivery/arbitration/find a buyer are still “ongoing” for SMM’s high risk projects- 2 jack-up (JU) for Perisai, 3 JUs for Oro Negro, 1 JU for Marco Polo and 1x semi-sub for North Atlantic
  • Hercules Highlander (JU) could be the latest high-risk addition as Hercules Offshore entered into forbearance period to accept delivery due to a dispute with some lenders. The rig is backed by a charter with Maersk Oil
  • Non-resolution of delivery could lead to a provision of c.S$40m (based on EBIT % of 13%). 

■ Maintain Reduce, valuation too steep 

  • Our FY16-18F EPS is up by 4-12% to adjust for EI gain and better Cosco performance. 
  • Valuation is steep at 28x CY17 P/E vs. 37% earnings deterioration and 1.3x CY16 P/BV vs. ROE of 7.8%. 
  • Risk of rights issue could be a key de-rating catalyst.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-04-28
CIMB Securities SGX Stock Analyst Report REDUCE MAINTAIN REDUCE 0.90 Same 0.90