Sembcorp Marine - Maybank Kim Eng 2016-04-28: On a Slippery Slope

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine (SMM SP) - On a Slippery Slope

1Q16 PATMI of SGD54.8m (-48% YoY, -110% QoQ) was bolstered by SGD3m writeback of prior year bonus provision, SGD6.8m of net forex and SGD9.3m of disposal gain.
Adjusting for these, 1Q16 is in line with our expectations but below consensus.
EBIT margin was higher QoQ at 7.8% (4Q15: 7.5%, 1Q15: 10.6%), but would have been c.6.7% if we account for the one-offs.

We adjust FY16E/17E/18E by +3%/-15%/-1% for one-offs, contract deferrals and lowering of EBIT margins from 8.3-8.8% to 6.8- 8.0%.
Maintain SELL and SGD1.00 TP, which is based on NTA adjusted for potential writedowns.
Implied FY16E P/BV is 0.8x.

SMM said it initiated arbitration to register its claim to maximise recovery from Sete Brasil’s bankruptcy. It shared that once the court approves the bankruptcy, Sete would have 60 days to propose a recovery plan and this could be the next milestone to watch.
While SMM took a SGD329m provision for Sete in 4Q15, we are uncertain if further writedowns need to be made especially for its SGD1b yard investment in Brazil. SMM said no further writedowns are needed at this point.

In FY16, SMM expects to deliver
1. Hercules’ jackup,
2. Noble’s CJ70 jackup,
3. FPSO for Libra field and
4. offshore platform for Ivar Aasen.
It could collect SGD1.5-2.0b cash if these are successfully delivered. But according to Upstream, Hercules’ creditors have blocked its funding access, although the unit has a secured 5-year charter with Maersk Oil.
Our concern is that beyond these deliveries, SMM may have limited rig contracts to recognise in FY16-17E given the several deferments and suspension of Sete Brasil recognition.

We maintain our negative view, as we see a rig order drought over the next two years plus the various overhangs on the stock.
Catalysts to our call could come from
1. more deferments or cancellations and
2. more writedowns.
Upside risk from potential privatisation or a sustained rebound in oil price that could induce fresh rig ordering momentum.

Parent company Sembcorp Industries decides to privatise SMM at a premium.
Sete Brasil manages to secure financing to pay SMM its dues and expresses confidence that its contracts will be intact.
SMM manages to sell Marco Polo rig and North Atlantic drilling rigs for huge profits like when it did during GFC.

Sete Brasil cancels orders for seven drillships worth USD5.6b and cannot pay dues.
More contract cancellations requiring write-down of its SGD10.4b order book as of FY15.
Order drought or price sacrifices to secure orders in 2016.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-04-28

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.00 Same 1.00