Sembcorp Marine - DBS Research 2016-04-28: Brace for more turbulence ahead

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SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine - Brace for more turbulence ahead 

• 1Q16 results below; lower topline and profitability 
• Provisions are probably adequate under present circumstances 
• Uncertainty surrounding Brazil and several other rig projects are concerns 
• Maintain FULLY VALUED and S$1.24 TP 

Reiterate FULLY VALUED rating on SMM with TP of S$1.24, based on 1.0x FY16 P/B. 

• Sembcorp Marine (SMM) is currently trading at 1.4x P/B after the share price rally, alongside the oil price’s bounce to the US$40 level, but this could be short-lived without any meaningful change in fundamentals. 
• 1Q16 results were below expectations with net profit plunging 48% y-o-y. 
• We have trimmed FY16-17F earnings by 10-14%. 

Choppy waters ahead. 

• While SMM had made 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 33% 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 1.1x. 

Declining order book. 

• Its orderbook declined to S$9.7bn as at end-Mar 2016, from S$10.4bn a quarter ago and is set on a declining trend in anticipation of sluggish order flows. 
• We believe rig orders are unlikely to make a comeback anytime soon, given the supply glut amid the oil crisis. 
• New order wins of S$3.2bn in 2015 came 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 in new orders in 2016. There could be downside to our new order win assumption as SMM has only clinched a dismal S$60m LNG fabrication order YTD. 

Valuation: 

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

Key Risks to Our View: 

• Key downside risks are sustained low oil prices which affect rig count and newbuilding activities, execution risks in 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.

Janice CHUA DBS Vickers | Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2016-04-28

DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 1.24 Same 1.24