Sembcorp Marine - CIMB Research 2016-07-28: Protracted winter

Sembcorp Marine - CIMB Research 2016-07-28: Protracted winter SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine - Protracted winter

  • 2Q16 core net profit of S$19.6m below our and consensus estimates. 1H16 core net profit at 34% of our FY16 due to forex loss and weaker Cosco shipyard group.
  • Reported profit of S$12m included S$8m impairment on investment in Cosco Corp.
  • Net gearing improved to less than 1x as at July with the receipt of S$910m from delivery of Noble and Denorske projects. This spurred interim DPS of S$0.015.
  • Negatives of deferrals and Sete Brasil uncertainty widely known but valuation steep at 25x CY17F P/E. Maintain Reduce and TP, still based on 0.7x CY16F P/BV.

Single out the culprits

  • 2Q16 core net profit was hit by S$35m forex loss, of which 50% were due to net receivables and bank balances in GBP and 50% in US$. SMM’s GBP exposure is mainly from the Culzean topsides project for Maersk Oil North Sea in the UK (contract valued at c.US$1bn). 
  • Associate Cosco swung into a S$4.7m loss (1Q16: profit of S$2m). SMM also incurred S$8m marked-to-market impairment loss on its investment in Cosco Corp.

Forex swing reported EBIT margin

  • Reported EBIT margin of 5.9% included the S$35m forex loss. 1Q16 EBIT margin of 7.8% also included forex loss of S$17m. 
  • Stripping forex impact, EBIT margin would have remained 9.7% in both quarters.

Variation orders = new orders?

  • SMM re-categorised variation orders as new orders and disclosed winning S$320m of orders YTD, comprising S$140m of LNG modules and S$180m of floating, production storage and offloading (FPSO)-related work. As such, we cut our new order assumption from S$1.5bn to S$0.9m for FY16 given the weakness thus far. 
  • Closing sizeable projects in the non-drilling segment could take a longer time to materialise and lumpier in nature.

Gearing to improve to 0.8x by end-16

  • Gearing was at 1.1x in 2Q16 (1Q16: 1.15x) but improved to below 1x in July with the collection of S$910m from delivery of projects -- S$550m from Noble jack-up and S$358m from Detnorske platform and Modec FPSO. 
  • We expect SMM to receive c.S$700m of final milestone payment in 2H16 for the deliveries of Wheatone and Bechtel LNG projects (estimated collection of S$260m) and FPSO Libra (c.S$400m). This could improve net gearing to 0.8x by end-16 as capex tapers to c.S$450m.

Steep valuation; maintain Reduce

  • We cut our EPS by 2-11% to reflect weaker EBIT margin from the current quarter and new order cut. 
  • Maintain Reduce as valuation remains steep at 24x CY17F P/E against a 33% earnings deterioration. 
  • We think the risk for rights issuance could have dissipated with the help of cash collections. Replenishing order is key to ensure operating leverage. Order book stands at S$6bn. 
  • Weaker-than-expected orders is the key de-rating risk. 
  • Upside risks to our call include stronger-than-expected recovery in oil price and super gain from disposal of deferred rigs.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-07-28
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