Sembcorp Marine - CIMB Research 2016-12-05: Awaiting orders

Sembcorp Marine - CIMB Research 2016-12-05: Awaiting orders SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Awaiting orders

  • The worst could be over for SMM after its divestment of Cosco Shipyard Group; Cosco had a see-saw effect on its earnings.
  • The completion of high-risk jack-ups could have also eased its working capital requirement.
  • However, order momentum may take a while to normalise given the global glut in rigs. There is also risk of inventory impairment of the 13 undelivered rigs.

Worst is over without Cosco 

  • One of the overhangs for SMM could be removed as it recently divested its 30% associate stake in Cosco Shipyard Group (CSG) for S$221m, booking a S$43m gain. Associate contribution from CSG has fluctuated qoq since 2009 and worsened from 2014 with falling oil prices as the yard was hit by an order drought, numerous provisions due to deferrals and more cancellations. 
  • Since 4Q14, SMM has 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.

Unexpected turn of events and lessons learnt in past 2 cycles 

  • Speculator risks. Pre-GFC, above 50% of SMM’s orders were dominated by rig speculators (largely Norwegians). The credit crunch in 2009 resulted in a slew of cancellations and SMM went to great pains to hunt for buyers. The rigs were sold at good profits as GFC was a temporary blip. Since then, we believe SMM has been more cautious in chasing orders from speculators.
  • Capex first, orders follow. 2011-2015 were the years that SMM hiked up its investments in the two mega yards – Brazil (c.S$1.2bn) and Singapore (c.S$1.6bn).
  • The unexpected oil price crash in 2015 has deferred the payback period and returns of investments.
  • Payment terms. In the past five years, competition from Chinese yards has forced the Singapore yards to level up and provide attractive back-end loaded payment terms, financing the customers. This, and the expansion of yards, has worsened SMM’s balance sheet from net cash pre-2014 to net gearing of 1x today.
  • 10 undelivered rigs, excluding Sete Brasil. SMM is holding onto a portfolio of undelivered rigs – three for Oreo Negro, two for Perisai Petroleum, one for Marco Polo, one semi for North Atlantic and three speculative-built units.

It may take a while to normalise 

  • We believe it will take a while before there is any hope of orders normalising. 
  • We are forecasting S$1.5bn and S$2bn of orders for FY17 and FY18, respectively. SMM secured S$320m as of 9M16. 
  • Our EBIT margin expectations are 6.7%, 6.4% and 9% in FY16, FY17 and FY18, respectively. 
  • Forex losses from a weakening GBP could recur in FY17 as SMM executes the c.US$1bn project for Maersk Oil.

Maintain Hold

  • Our target price (S$1.40) is based on 1.3x CY17 P/BV (long-term -1 s.d. of mean). 
  • Re-rating catalysts include higher-than-expected orders and settlement of the undelivered rigs.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-12-05
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.400 Same 1.400