Sembcorp Marine - UOB Kay Hian 2016-07-29: 2Q16 Net Profit Down 90% On One-Offs; S$260m Contract Wins Are VOs

Sembcorp Marine - UOB Kay Hian 2016-07-29: 2Q16 Net Profit Down 90% On One-Offs; S$260m Contract Wins Are VOs SEMBCORP MARINE LTD S51.SI 

Sembcorp Marine (SMM SP) - 2Q16: Net Profit Down 90% On One-Offs; S$260m Contract Wins Are VOs

  • 2Q16 headline net profit of S$11.5m (-90% yoy) and 1H16 net profit of S$66.3m formed 46% of our estimates. Earnings continued to be hampered by the downturn. 
  • Contract wins for the quarter were variation orders totalling S$260m. Cash inflow of S$909m from delivery of projects lowers net gearing to less than 1.0x as of Jul 16, and is expected to fall further. 
  • We cut our contract win assumption to S$1.5b p.a. from S$2b-3b previously, and adjust reported earnings by 5-7%. 
  • Maintain HOLD, with unchanged target price of S$1.27. Entry price: S$1.20.


RESULTS


2Q16 net earnings down 90% on S$43m of one-off charges. 

  • Sembcorp Marine (SMM) reported headline net profit of S$11.5m for 2Q16, and S$66.3m for 1H16. This was 46% of our FY16 reported profit estimate. 
  • Excluding S$43m of one-offs (which comprise S$35m forex loss from movements in the GBP and USD and a S$8.4m impairment charge on its holdings in COSCO Corp), SMM’s core net profit was S$54.8m for 2Q16, and S$90.3m for 1H16. 
  • The lower earnings were a reflection of lower turnover in its rig building segment, as well as a two-fold increase in interest expense from higher debt load.

2Q16 Repair and Upgrade revenue down 12%. 

  • A higher number of vessels were repaired in 2Q16 (133) as compared with 2Q15 (114). Revenue however came in lower at 12%, as average revenue per vessel slipped 25% yoy. This was attributed to a bigger mix of small value repair contracts for the period. 
  • According to management, repair enquiries remain high, with margins remaining stable.

Core operating margin up 1.6ppt qoq to 9.4%. 

  • Excluding the forex charge, SMM 12.0 reported a core operating profit of S$86m for 2Q16, translating to a 9.4% operating
  • offshore platform projects. We expect net gearing to decline as SMM makes delivery of several floater projects in 2H16.


STOCK IMPACT


S$260m contracts secured in 2Q16. 

  • SMM reported that it had secured a total of S$320m in contracts as of 1H16, implying that S$260m was secured during the quarter. The contract wins are broken down into: S$80m from expansion of scope for its Yamal LNG project, and another S$180m from variation orders of its FPSO projects. The definition of win is subjective as the “wins” were actually variation orders (VO), and we do not recall SMM declaring VOs as contract wins in recent history. We expect these VOs to be recognized within 2H16.

Earnings under pressure as orderbook depletes. 

  • Net orderbook was reported at S$9.2b, but still included the deferred Sete Brasil and jack-up rig/semi projects. Excluding those orders, net orderbook is estimated at S$4.7b. 
  • At its current orderbook burn rate, earnings are under pressure to decline significantly by 2017 unless several large orders are secured. Our order win assumptions are challenged.

Cash inflow from project delivery in 2H16 to further lower net gearing. 

  • SMM expects 8 to deliver five projects in 2H16, and as its revenue mix shifts towards more milestone payment-based projects, debt should decline. 
  • We had earlier estimated S$1.6b in cash 6 inflow for SMM on delivery of its projects this year, which will lower net gearing to 96%. Financial results thus far are consistent with our view. 

Provisions remain sufficient. 

  • Provisions for Sete Brasil and its deferred rig orders remained unchanged at S$329m and S$280m respectively. Management maintains that this was sufficient.

Cutting contract wins for 2016-18. 

  • The contracting environment outlook remains tough, with no major recovery till 2020 in our view. 
  • We are reducing our contract win assumption to S$1.5b across 2016-18, from S$2b-3b previously.

Adjusting reported earnings by 5-7%. 

  • We have adjusted our 2016 revenue upwards to the immediate contribution for the recently-announced contract win. This increases our 2016 reported earnings for SMM by 7% to S$154m, from S$144m previously. 
  • Our 2017-18 earnings are adjusted to S$105m (+5%) and S$121m (-7%), primarily on the back of our change in contract win assumption. 
  • On a core basis, the increase to SMM’s 2016 adjusted earnings estimate is larger, from S$125m to S$178m owing to the one-offs recognised thus far.


VALUATION/RECOMMENDATION


Maintain HOLD, target price unchanged at S$1.27. 

  • While the risk of a cash call is abating, the weak earnings outlook and lacklustre contract wins have caused us to maintain a HOLD on SMM. 
  • Our target price is pegged to 1.0x 2017F P/B, a 24% discount to its historical trading multiple from 2000-03 before the start of the rig construction boom. 
  • We also maintain our bear-case target price of S$0.90 in the unlikely event that SMM makes further impairments on rig orders at risk. Entry price is S$1.20.


RISKS

  • A prolonged slump in oil price, leading to order cancellations or client bankruptcies.




Andrew Chow CFA UOB Kay Hian | Foo Zhiwei UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-29
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.27 Same 1.27


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