.SI
Sembcorp Marine Ltd - In Survival Mode
- Dragged by the cyclical downturn of Offshore and Marine (O&M) sector, Sembcorp Marine (SMM) is undergoing a tough period.
- Persistent near-term headwinds; may see turnaround only in 2017.
- SMM has taken mitigating steps; now in survival mode.
- M&A and divestiture opportunities prevail at the trough of the cycle.
- We initiate coverage on SMM with a Sell rating and a target price of S$1.16 based on forward P/E of 12.2x, which implies a downside of 24.9%.
Investment Thesis
Slow oil market recovery amid a lacklustre near-term outlook.
- In retrospect, oil price plunged from over US$100/bbl since mid of 2014 and trended downward for the whole 2015. The deterioration continued to Jan 2016 and logged a 12-year low at just under US$30/bbl. Thereafter, the oil price has recovered to the current level at around US$50/bbl.
- Fundamentally, the supply glut still exists and is expected to ease only by end of 2017.
Currently, the offshore and marine sector is facing a cyclical downturn, awaiting to revive in 2017 or 2018
- The estimated offshore exploration and production spending fell to new low since 2012 but is expected to start recovering in 2017.
- Offshore drilling market fell along with the oil price plunge and display a lag. Rig count continues to drop, and the overall utilisation rate remains low.
- Floater market sees potential turnaround despite the current weak demand, and expects to bottom out in 2017.
- The mismatch between supply and demand of offshore support vessel worsens, leading to a slow recovery.
- The number of vessels call for repair in Singapore shipyard is trending down.
Valuation Methodology
- Our primary valuation method is using the simple average of the forward P/E ratio during the oil market crash from Jul 2014 till now. We think that the market sentiment has been factored into the forward P/E since SMM’s price is highly correlated to the oil price, which fluctuated along with the market events closely.
- Currently, SMM is trading at a forward 12-month P/E of 14.6x, which is between the range of +1 S.D. and +2 S.D. of its historical mean. We think the average P/E of 12.2x as the base multiple is reasonable because SMM will still see near-term pressure in this year.
- We initiate SMM with a Sell rating and a target price is $1.16, based on estimated 9.5 Singapore cents FY16 EPS and a P/E ratio of 12.2x. This implies a downside of 24.9% (including dividends) from the last closing price.
Chen Guangzhi
Phillip Securities
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http://www.poems.com.sg/
2016-07-04
Phillip Securities
SGX Stock
Analyst Report
1.16
Same
1.16
