Sembcorp Marine - CIMB Research 2017-01-05: Overhang removed

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Overhang removed

We remove the impairment risk discount for its Brazilian yard as we expect to see some activities to justify the yard's ‘value in use’.
The P-68 hull for Petrobras FPSO arrived at its Brazil yard in Dec ‘16 for integration.
Pemex recently extended its charters for five existing Oro Negro jack-up rigs, spelling hope for delivery of SMM’s rigs, in our view.

SMM is a direct proxy for recovery in exploration and production (E&P) spending.

Petrobras’ floating production, storage and offloading (FPSO) vessel, P-68 hull (built by Brazilian Rio Grande), arrived in SMM’s Brazil Jurong Aracruz yard in Dec for integration.
SMM secured the modules construction and integration for P-68/P-71 in 2012 for US$674m. It completed c.30% of the modules, with steady payment from Petrobras. Delivery of the two FPSOs is slated for 2019-20.
We think the kick-start of activity in the Brazilian yard may justify its ‘value in use’ and remove the impairment risk.

Oro Negro recently finalised an agreement with Pemex to extend the charters for five of its existing jack-up rigs, albeit at a lower rate of US$116.3k/day from US$130k/day. This included the contract resumption of two units that were suspended for 12 months. This spells hope for delivery of the three completed Oro Negro jack-ups at SMM, in our view.
These rigs were contracted at c.U$211m in 2013 with profit (EBIT c.15%) reversed in 2015.

We expect order wins of S$1.5bn for 2017F and S$2bn for 2018F as we pen in orders for fixed platform and FPSO projects. As non-rig projects command larger ticket sizes (from US$200m-US$1bn), we believe SMM could easily exceed our forecasts if it secures more than one project. Enquiries for non-rig jobs remained stable but higher oil prices could nudge contract award pace, in our view.
In 9M16, SMM only announced c.S$320m of orders. Order book excluding Sete Brasil was at S$5.2bn at end-9M16.

SMM is due to announce its 4Q16 results at end-Feb. We think there could be some negative forex impact on its GBP contracts which could still swing its margin.
We cut our FY16F EPS by 26% to factor in lower margin due to potential forex impact. Assuming GBP/SGD movement will be less drastic as the dust in UK settles post Brexit, we believe forex effects could be minimized and EBIT margin should improve.
We forecast EBIT margin of 6.3%, 6.9% and 9% for FY16-18F.

An unexpected turn of events has enhanced SMM’s experience in the past 10 years, in our view. These include
1. speculators risks,
2. capex risks – Sete Brasil and Brazilian yard, and
3. financing risks – back-loaded payment terms.
We believe all of these issues have been priced in as 1) and 2) are largely provided for. SMM is also more cautious in financing customers, with milestone and progressive payment terms enforced.

SMM is trading at 1.1x CY17F P/BV (GFC’s trough: 1.04x), below -1 s.d. of its 25-year mean.
Removing the impairment discount on its Brazilian yard lifts our TP to S$1.70, still based on 1.3x CY17F P/BV (-1 s.d. of mean).
We see delivery of rigs and higher-than-expected order wins as key catalysts. Key risk is cancellation of non-rig orders.

LIM Siew Khee CIMB Research | Cezzane SEE CIMB Research | http://research.itradecimb.com/ 2017-01-05

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