Sembcorp Marine - OCBC Investment 2016-04-28: Hoping for successful deliveries this year

Sembcorp Marine - OCBC Investment 2016-04-28: Hoping for successful deliveries this year SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine: Hoping for successful deliveries this year 

  • 1Q earnings in line 
  • 1.1x net gearing 
  • Successful deliveries for cash inflows 

1Q16 results in line 

  • Sembcorp Marine (SMM) reported a 29.6% YoY drop in revenue to S$918.4m and a 48.2% fall in net profit to S$54.8m in 1Q16, accounting for 23% and 26% of our full year estimates, respectively, hence in line with our expectations. 
  • The drop in revenue was mainly due to lower contributions from the rigs and floaters segment (-43% YoY to S$540m), while the offshore platforms segment saw a 10% rise in revenue at S$261m. 
  • Gross profit margin was 8.8% in the quarter, compared to 13.0% in 1Q15. 

Capex of only S$102m in 1Q16 

  • Capital expenditure slowed down considerably to S$102m in 1Q16, though it is unclear whether the run rate will remain the same for the rest of the year. 
  • Recall that the group incurred capex of S$905m in FY15 and S$772m in FY14, mostly due to the new yards in Singapore and Brazil. As such, the group’s net gearing only inched up slightly from 1.0x in 4Q15 to 1.1x in 1Q16. 
  • Meanwhile, there were net operating cash outflows of S$72.9m in 1Q16, mostly due to working capital needs. 

Expects S$1.5-2b cash inflow from four projects, but risks remain 

  • SMM expects its working capital needs to be lower this year, and that the deliveries of the 
    1. Hercules jack-up,
    2. Noble CJ70 jack-up,
    3. offshore platform for Ivar Aasen, as well as the
    4. Libra FPSO project to result in cash inflow of S$1.5-2.0b by the end of the year.
  • Hercules, however, has lodged an SEC filing stating that it had entered into a forbearance agreement with its creditors, and could face problems accepting delivery of this completed unit. 
  • Our current estimates assume that payments on the above projects materialise, but there could be downside risk given the difficult operating environment. However, given better valuations in the sector as oil rebalances, we increase our P/B from 0.85x to 0.9x, such that our fair value estimate rises from S$1.08 to S$1.14. 
  • Still, we maintain our SELL rating on the stock as we believe current valuations remain rich. 

Low Pei Han OCBC Securities | http://www.ocbcresearch.com/ 2016-04-28
OCBC Securities SGX Stock Analyst Report SELL Maintain SELL 1.14 Up 1.08