Sembcorp Marine - DBS Research 2016-07-29: Awaiting signs of turnaround

Sembcorp Marine - DBS Research 2016-07-29: Awaiting signs of turnaround SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine - Awaiting signs of turnaround

  • 2Q16 dragged by forex loss.
  • Delivery of drilling rigs remain a challenge.
  • Interim dividend of 1.5 Scts per share declared.
  • Maintain FULLY VALUED; TP S$1.20.



Reiterate FULLY VALUED rating with TP of S$1.20, based on 1.0x FY16 P/B. 

  • Sembcorp Marine (SMM)’s 2Q16 net profit plunged 91% y-o-y to S$11.5m dragged by forex loss of S$35m and S$8m impairment charge on Cosco shares. Stripping these out, results were broadly in line. 
  • We have cut FY16-17F earnings by 26-31% factoring in the forex loss in 2Q, pushing back commencement of Sete projects to 2018 and lowering our order win assumption.


Environment remains challenging. 

  • While SMM had made provisions of S$609m for 75% of the outstanding rig orders in FY15, additional provisions could still be required if the operating environment deteriorates further, especially in Brazil, which accounts for 35% 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 1.0x.


Declining order book. 

  • Its orderbook declined by S$500m q-o-q to S$9.2bn as at the end of June 2016, and is set to decline further as we anticipate order flows to remain sluggish. The orderbook stood at S$6bn excluding Sete’s rig orders. 
  • 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 now expect SMM to secure S$1.5bn in new orders in 2016 (from S$2.5bn earlier). SMM has clinched orders worth S$320m year-to-date.


Valuation:

  • Our target price of S$1.20 is based on 1.0x FY16 P/B, which is justifiable, as 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 of vessel sales.




Janice CHUA DBS Vickers | Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2016-07-29
DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 1.20 Down 1.24


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