Sembcorp Marine - CIMB Research 2016-11-15: Dis-associated Cosco

Sembcorp Marine - CIMB Research 2016-11-15: Dis-associated Cosco SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Dis-associated Cosco

  • One of the overhangs for SMM could be removed as it divests its 30% associate stake in Cosco Shipyard Group (CSG) at S$221m, booking in S$48m gain.
  • Share of CSG loss of S$27m in 3Q16 was the key culprit for SMM’s loss.
  • Unfailing provisions for cost overrun and order cancellations had resulted in erratic associate contribution to SMM, with cumulative losses of c.S$210m since 4Q14.
  • Although we had factored in zero earnings contribution from FY17F, we believe there could be some upward earnings revision by the streets.
  • Upgrade from Reduce to Neutral with a revised target price of S$1.40, on a 1.3x FY17F P/BV (long-term -1 s.d. of mean) and net of partial impairment in Brazil yard.

S$221m cash consideration help with working capital 

  • SMM is disposing of its 30% equity stake in Cosco Shipyard Group for a consideration of Rmb1,059m (approx. S$220.68m). 
  • The net proceeds (after deducting capital gains tax and forex impact) result in a gain of S$48.3m over the carrying value of the investment in CSG of S$180.1m. 
  • The proceeds represent c.23% of SMM’s 9M16 cash balance of S$967m. The amount would help to fund some of its working capital, although reported net gearing ratio still remains high at c.1.11x. 

Time to cut loss 

  • SMM invested in SOE-linked CSG during the hey days in 2004 at S$49m to grow its rigbuilding and ship repair business in China. China Cosco Group holds c.49.5% in CSG.
  • CSG has six shipyards, located in Dalian, Nantong, Shanghai, Qidong, Zhoushan and Guangzhou. Investment in CSG yielded good profits during the peak of rig cycle from 2005-2008. However the yard was badly hit by GFC as bulk carrier orders were cancelled in addition to credit crunch by offshore customers.

Erratic associate contribution 

  • Associate contribution from CSG fluctuated qoq since 2009 and worsened from 2014 as oil prices tumbled as the yard was hit by order drought, numerous provisions due to deferrals, and more cancellations. 
  • Since 4Q14, SMM had booked a cumulative loss of S$210m with the largest chunk in 4Q15 (S$150m) as Cosco Corp reported S$484m loss due to inventory write-offs and provision of doubtful debts. 
  • We see the divestment as a key positive; at least the uncertainty in losses is removed.

Limited risk for the remaining 4.98% stake in Cosco Corp 

  • SMM’s 4.98% stake in the listed entity, Cosco Corp remains. The carrying amount of the investment was marked to market in 9M16 to c.S$29.5m. 
  • We believe the risks of further impairment in Cosco Corp’s shares is limited. The stock is trading at c. 0.78x FY16F P/BV.

Upgrade from Reduce to Neutral 

  • We keep our core EPS forecasts but lift our P/BV valuations (net of partial impairment in Brazilian yard) from 1x (long-term trough) to 1.3x (-1 s.d. of mean). 
  • We are less inclined to upgrade SMM to an Add as its order momentum is still patchy amidst a supply glut in the jack-up rig market. 
  • Upside risks to our call include stronger-than-expected sustained recovery in oil prices and settlement of contentious Brazilian rigs. 
  • Downside risks are prolonged weakness in orders and further impairment on undelivered jack-up rigs.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-11-15
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