Sembcorp Marine - CIMB Research 2017-02-23: Floating hope

Sembcorp Marine - CIMB Research 2017-02-23: Floating hope SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Floating hope

  • FY16 core net profit came in at 119% of our forecast and 105% of consensus due to forex gains and tax credits in 4Q16. There were no provisions for impairment.
  • Order outlook is encouraging as SMM is in multiple negotiations for LNG and FPSO contracts. We raise our orders for 2017 and 2018 to S$2.5bn p.a. (from S$1.5bn).
  • Raise EPS by 5-28% on lower interest costs and higher orders. Our TP is raised to S$1.88 as we peg it to 1.5x P/BV (1.3x prev.) on better order prospects.

Weaker revenue in 4Q16 with noises from forex gain, tax credit and marked to market losses 

  • 4Q16 net profit of S$34m included non-recurring marked to market losses of S$16m on investments, offset by S$9m tax credit from unutilised tax losses as well as a net forex gain of S$36m due to stronger US$ and GBP. 
  • Recall that as of 9M16, SMM had cumulative net forex losses of S$43m. 
  • Revenue dipped 7% qoq to S$830m mainly from lower offshore platforms revenue (S$200m, -39% qoq).

Margin could swing on forex fluctuations 

  • In contrast to 3Q16, EBIT margin swung from 3.7% (due to forex losses) to 8.1%, thanks to forex gains. Excluding the forex impact, FY16 EBIT margin was 6.5% vs. 10.7% in FY15, in line with weaker operating leverage on lower revenue. 
  • We forecast EBIT margins of 6.7% and 9% in FY17-18F, assuming a less volatile swing in currencies.
  • Generally, a weaker SG$ vs. US$/GBP would benefit SMM.

One to two Gravifloat contracts in 2017 

  • SMM is in multiple discussions for modularised LNG and LPG solutions – Gravifloat – one of the companies is Chinese Poly-GCL. 
  • Benchmarking to newbuild FLNG prices, each contract could be over US$1bn. We expect EBIT margins of 8-10% (less than 60% are equipment costs). 
  • Management plans to recruit and re-train its staff to equip it with non-drilling LNG skills, signaling that a contract is close. Its stake in Gravifloat AS will also be stepped up from 56% to 100% upon securing the second contract.

More hulls contracts from Petrobras 

  • SMM is in discussions with Petrobras for two FPSO hulls: 
    1. a variation order for P-68 hull and 
    2. reconstruction of P-71 hull. 
  • Both hulls are partially completed by its Brazilian yard (see our report Overhang removed). These spell hope for more contract wins in 2017. 
  • Building in Gravifloat and Petrobras, we raise our order expectations to S$2.5bn p.a. in 2017 (from S$1.5bn) and 2018 (from S$2.2bn). SMM secured S$320m worth of orders in 2016 with its current order book ex-Sete Brasil at S$4.7bn.

Net gearing to improve to 0.9x or less by end-17 

  • Net gearing stood at 1.14x at end-16. 
  • The Phase 2 yard expansion was completed in Jan 17. We estimate a capex of S$115m in FY17F (S$90m expansionary and S$25m maintenance). 
  • With the expected proceeds of S$221m from Cosco divestment and delivery of OOTGK Libra FPSO (c.S$200m) by 1Q17, net gearing could come down to 0.9x. Upside could come from the sale of jack-up rigs (c.US$160m each). 
  • A final DPS of S$0.01 was declared, bringing the total DPS to S$0.025 or 67% payout.

Maintain Add with higher target price 

  • We raise FY17-18F EPS by 5-28% to reflect stronger orders and lower interest costs.
  • We raise our TP to S$1.88, based on 1.5x P/BV, benchmarking average trading band from 1996-2003, a period of weak oil prices and pre-rig boom. 
  • Stronger-than-expected orders could be the key catalyst while sudden collapse in oil price could be the key risk.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-02-23
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.88 Up 1.700