Sembcorp Marine - OCBC Investment 2016-10-26: Cutting costs

Sembcorp Marine - OCBC Investment 2016-10-26: Cutting costs SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Cutting costs

  • Results below expectations.
  • Dragged by forex losses and COSCO.
  • Two yards to be returned next year.

3Q16 results disappointed, dragged by forex and associate 

  • Sembcorp Marine (SMM) reported a 21.4% YoY fall in revenue to S$888m and a net loss of S$21.8m in 3Q16, such that 9M16 net profit of S$44.5m accounted for 57% and 53% of ours and the street’s full year expectations, respectively. 
  • Results were below expectations, mainly due to S$18.9m of forex loss from the revaluation of assets denominated in GBP to SGD, as well as S$27.7m share of loss of associates. 
  • Operating profit was S$32.9m compared with S$74.8m for 3Q15. Excluding the effects of foreign exchange, operating profit for 3Q16 was S$51.8m. 
  • On a more positive note, SMM generated operating cash flow of S$796m, which contributed to a reduction in its net gearing from 1.11x as at end Jun to 1.03x as at end Sep.

Managing yard capacity 

  • Phase 2 of SMM’s Tuas Boulevard Yard (TBY) is scheduled to be completed in 1Q17. Meanwhile, two of the group’s yards (Benoi yard at Shipyard Road and Tuas Road yard) in Singapore will be returned to the government next year, resulting in cost savings from fewer operating leases. 
  • SMM will continue to leverage and maximise the utilization on its TBY yard while it reviews the schedule for returning the other yards in Singapore at or before their lease expiry date. 
  • The new EJA yard in Brazil will be fully completed by 4Q17.

Other measures to cut costs 

  • Since 2015, the group has also reduced its workforce by about 8,000, comprising employees and sub-contractors’ manpower, and has also taken measures to reduce operating costs by implementing salary freezes and adjustments to the variable remuneration components for management staff.

Outlook remains challenging 

  • SMM’s net order book at end Sep 2016 stood at S$8.4b; excluding the Sete Brasil drillships, the net order book amounted to S$5.2b. 
  • Recall that SMM secured S$320m of new orders for non- drilling solutions (variation work) in 1H16, but clinched no new orders in 3Q16. The outlook remains challenging and we think current valuations remain rich. 
  • Maintain SELL with unchanged S$1.13 fair value estimate on the stock, based on 0.9x FY17F book.

Low Pei Han OCBC Investment | http://www.ocbcresearch.com/ 2016-10-26
OCBC Investment SGX Stock Analyst Report SELL Maintain SELL 1.13 Same 1.130