Sembcorp Marine - CIMB Research 2017-04-27: Hoping For Orders. Share Price Weakness Short-Term

Sembcorp Marine - CIMB Research 2017-04-27: Hoping For Orders. Share Price Weakness Short-Term SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Hoping For Orders. Share Price Weakness Short-Term

  • SMM posted 1Q17 core loss of S$7m vs. our/Bloomberg consensus expectation of S$24m/S$29m profit. Reported profit lifted by S$47m of divestment gain.
  • 1Q17 EBIT margin at 1.8% vs. FY16 average of 6.4% due to additional costs incurred for a floater; excluding that, EBIT similar to 4Q16's (8%).
  • SMM is still hopeful of securing some orders from Gravifloat, albeit taking longer to come to fruition. YTD orders were mainly variation order of S$75m.

Earnings miss due to additional costs incurred 

  • We would not have guessed SMM would incur additional costs on a floater project which caused 1Q17 EBIT margin to dip to 1.8% from 8% in 4Q16. Excluding the gain of S$46.8m from the divestment of its stake in Cosco, SMM made a core loss of S$7.2m.
  • The losses would have been worse if not for the positive tax of S$2.8m, and forex gain (S$3.9m) and miscellaneous income of S$7.2m.

1Q17 revenue spot on 

  • 1Q17 revenue of S$760m (-17% yoy, 8% qoq) was in line with our expectation, forming 25% of our FY17 forecasts. The underperformance of rigs and floaters, with lower revenue of S$347m (-30% qoq, -36% yoy), was offset by stronger offshore platform revenue of S$302m (+51% qoq, +16% yoy), helped by Maersk Culzean topside jobs.
  • Ship repair revenue was a slight miss at S$90m (-18% qoq, -9% yoy), with 111 vessels repaired at slightly better average value per vessel of S$0.81m (1Q16: S$0.79m).

EBIT margin could recover in 2Q17 

  • SMM blamed the weak 1Q17 EBIT margin (still higher than KEP’s 0.8%) to additional costs incurred on a floater project (we believe it could be the FPSO delivered to OOGTK, originally contracted at US$696m). All costs for the project have been incurred.
  • SMM expects settlement with the customer to be finalised in 2Q17 and that excluding those costs, 1Q17 EBIT margin would not have differed materially from 4Q16's (8%). 
  • On rightsizing, SMM has cut 9,000 of its workforce since 2015 to the current 12,500 staff.

Higher net debt and capex; cash inflow to pick up in 2Q17 

  • Net debt deteriorated slightly to 1.18x in 1Q17 vs. 1.14 at end-Dec, likely due to a timing issue from receipt from customers. We believe cashflow could improve in 2Q17 as SMM expects to receive final payment (c.20% of contract or US$140m) from OOGTK’s FPSO when the vessel reaches its destination (Brazil). 
  • 1Q17 capex of S$52.7m was higher than previous guidance (it guided for maintenance capex of c.S$25m p.a.). We now expect FY17 capex of S$180m.

More enquiries, in the running for c.US$4bn of projects 

  • Management is seeing increased enquiries on its non-drilling equipment. We estimate SMM to be in the running for c.US$4bn worth of gas related and platform jobs in the market (excluding hull work for P68 and P71). 
  • SMM has secured S$75m of variation order YTD (S$22m offshore platform and S$53m floaters). We are keeping our FY17 order forecast intact at S$2.5bn. Order book stood at S$4bn at end-1Q.

Maintain Add and target price of S$1.88 

  • We tweak our FY17 EBIT margin to 6% from 6.7%, and cut our FY17F EPS by 3% to incorporate lower tax and higher depreciation. 
  • We expect SMM's share price to be under pressure in the short-term given the weak 1Q17 results. 
  • We keep our Add rating and target price, still based on 1.5x CY17F P/BV, benchmarking against the average trading band in 1996-2003, a period of weak oil prices and pre-rig boom. 
  • Catalysts include sale of deferred rigs and higher order wins.

LIM Siew Khee CIMB Research | Cezzane SEE CIMB Research | 2017-04-27
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.880 Same 1.880