Sembcorp Marine Ltd - Phillip Securities 2016-07-04: In Survival Mode

Sembcorp Marine Ltd - Phillip Securities 2016-07-04: In Survival Mode .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 | http://www.poems.com.sg/ 2016-07-04
Phillip Securities SGX Stock Analyst Report SELL Initiate SELL 1.16 Same 1.16