Sembcorp Marine (SMM SP) - Maybank Kim Eng 2016-10-26: Dragged Again by Forex

Sembcorp Marine (SMM SP) - Maybank Kim Eng 2016-10-26: Dragged Again by Forex SEMBCORP MARINE LTD S51.SI

Sembcorp Marine (SMM SP) - Dragged Again by Forex

3Q16 missed on forex and associate losses 

  • SMM reported 3Q16 net loss of SGD21.8m (-168% YoY, -290% QoQ), missing expectations. 9M16 PATMI of SGD44.5m (-82% YoY) formed 31/25% of our/consensus FY16E. 
  • The key drag was SGD18.8m of forex losses and SGD27.7m of associate losses attributed to Cosco (COS SP, Not Rated).
  • Adjusted for forex, operating profit would have been SGD51.8m, which is a slight beat. 
  • We cut FY16-18E EPS by 29-43% on account for the one-offs but more importantly, lower revenue due to weak order intake. 
  • Maintain SELL and SGD1.00 TP, which is based on NTA adjusted for our assessment of asset write-downs. Implied FY17E P/BV is 0.8x.

Weak order intake to pressure revenue and margins 

  • YTD order intake was SGD320m with no new orders in 3Q16, vs our original SGD1.6b forecast for the full year. We thus lower FY16E order intake to SGD0.7b for FY16. 
  • Outstanding orderbook of SGD5.2b (ex-Sete) is weighted heavily by: 
    1. Heerema contract; 
    2. EPC contract for Maersk Oil; and 
    3. 2 x Transocean drillships. 
  • We believe operating margins for the first two will be lower than the traditional 10-12% for rigbuilding contracts. The fall in revenue recognition would also further pressure margins due to operating leverage effect.

Operating cashflow was the bright spot 

  • The positive in 3Q16 was the SGD765m operating cashflow due to collections from project deliveries. This helped lower net gearing from 1.1x in 2Q16 to 1.0x. 
  • Most of the remaining contracts are on progressive payments and we are unlikely to see more big cashflows unless clients for its delayed jackup rigs take delivery.

Late-cyclical beneficiary; not time to get in 

  • Despite positive sentiment from expectation of OPEC production cuts, we remain negative on SMM as we see it is a late-cyclical beneficiary.
  • Re-rating is hard with weak earnings and lacklustre order intake.
  • Catalysts to our view are further deterioration in revenue recognition or more asset write-downs. Concerns were raised on the need for more write-downs for Perisai and Oro Negro rigs but SMM said provisions are sufficient for now. 
  • Upside risks could come from clients proactively taking delivery of delayed rigs or SMM reselling for super-normal profits.

Swing Factors


  • Parent company Sembcorp Industries decides to privatise SMM at a premium.
  • Sete Brasil manages to secure financing to pay SMM its dues and expresses confidence that its contracts will be intact.
  • SMM manages to sell Marco Polo rig and North Atlantic drilling rigs for huge profits like when it did during GFC.


  • Sete Brasil cancels orders for seven drillships worth USD5.6b and cannot pay dues.
  • More contract cancellations requiring write-down of its order book or Brazil yard.
  • Order drought or price sacrifices to secure orders.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-26
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.000 Same 1.000