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.

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 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).

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.

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.

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.

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 | http://research.itradecimb.com/ 2017-04-27

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