Sembcorp Marine - CIMB Research 2016-10-25: Burdened investment

Sembcorp Marine - CIMB Research 2016-10-25: Burdened investment SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Burdened investment

  • With a S$21m net loss in 3Q16, SMM missed both our and Bloomberg consensus expectations, dragged by its share of losses and impairment in Cosco Corp.
  • 3Q16 EBIT margin plunged to 3.7% (1H15: 6.9%) mainly from the weaker operating leverage and forex loss due to the revaluation of assets in GBP.
  • We are still wary of potential impairment for contagious jack-up rigs, but management sounded confident that provisions made in 2015 are adequate.
  • Cashflow improvement did not surprise us, coming mainly from final receipts from the Noble and Denorske projects in Jul 2016, but may not be sustainable into 4Q16.
  • Maintain Reduce but a successful sale of high-risk rigs could be a rerating catalyst.

Cosco nightmare lingers 

  • SMM’s share of Cosco Corp’s losses was S$27m as the yard issued a profit warning for a higher net loss in 3Q16 due to order cancellations, delivery delays, higher construction costs and provisions. 
  • SMM also made a S$3.8m provision for its stake in Cosco Corp (to add to the S$8.4m impairment in 2Q16). There is no clear strategy articulated on its stake in Cosco Shipyard Group or Cosco Corp but we believe the group restructuring at the China Cosco Shipping Corporation level may complicate any divestment possibility.

How low can margins go? 

  • Recurring forex losses from the weakening GBP have weakened 9M16’s EBIT margin to 5.8%. Excluding the forex impact (-S$18.8m), the EBIT margin would have been 8%.
  • We cut our average EBIT margin assumptions for FY16-18F from c.8% to c.7.4%.

We are wary of provisions 

  • Management reiterated that the S$280m provision made in 2015 for Perisai, Oro Negro and North Atlantic Drilling Rigs takes into account the prolonged deferment and possible cancellations of these contracts. Perisai’s rig no. 1 is complete and technically accepted while rig no. 2 is due for completion in 4Q16. 
  • We would question the potential downward revision in assumptions made for the WIP on the balance sheet if these rigs are not sold in the next 12 months, given the global rig supply glut situation, despite the recovery in oil prices.

Cashflow improvement not a surprise, but still tight 

  • SMM generated S$796m in operating cashflows in 3Q16 on final receipts from Noble jack-up (S$358m) and Denorske platform (S$358m). 
  • SMM was noncommittal on 4Q16F deliveries other than FSO Gina Krog (conversion contract at c. S$220m). 
  • We believe the delivery timeline for FPSO for OOGTK Libra (collection of c.S$400m) could be delayed to 2017 from end-2016. 
  • Net gearing stood at 1.04x. 
  • YTD new orders were S$320m from LNG modules and FPSO variation orders. Order book stood at S$5.2bn, ex-Sete Brasil.

Maintain Reduce 

  • We cut our FY16-18F EPS by 18-32% to account for weaker associates and margins.
  • We do not rule out the possibility of a cash call if SMM continues to be crippled by weak orders and difficulties in disposing of its risky rigs by 2017. 
  • We maintain our Reduce call and our target price (S$0.90) based on long-term trough valuation of 1x FY17F P/BV and net of partial impairment in Brazilian yard. 
  • Upside risks to our call include a stronger-than-expected sustained recovery in oil prices.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-10-25
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.90 Same 0.900