Sembcorp Marine - RHB Invest 2017-04-28: Lacking Excitement

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Lacking Excitement

Sembcorp Marine registered a core loss of SGD12m in 1Q17, which was attributed to lower work volume and cost incurred in relation to a specific floater project.
We expect EBIT margins to stabilise to c.5% from the low of 1.7% recorded in 1Q17. Orderbook stands at SGD4bn, replenishment is slow to come in for now but we expect it to pick up in FY18.

Maintain NEUTRAL with a higher TP of SGD1.65 (from SGD1.46, 4% downside) based on 1.3x P/BV, as we change our valuation methodology from P/E.

Revenue for 1Q17 came in at SGD760m, 8% YoY and 17% QoQ lower respectively. The weaker turnover was attributed to lower volume of work across rig building, floaters and ship repairs.
Offshore platforms were the only highlight of the segments, with revenue increasing 16% YoY as three projects are in the WIP stage.
Sembcorp Marine booked in an SGD47m gain on disposal, arising from its 30% divestment in Cosco Shipyard Group, which was completed in Jan 2017.
Reported net profit came in at SGD39.5m, 28% lower YoY. Stripping the gain on disposal, Sembcorp Marine registed a core loss of SGD12m. We understand that the loss is due to a specific floater project that incurred additional cost, and we expect settlement for the project to happen in 2Q17. As such, EBIT margin for 1Q17 fell to 1.8% compared to 7.8% in 1Q16. However, we expect EBIT margin to stabilise to c.5% for FY17 as projects in progress are recognised throughout the year.

Current orderbook stands at SGD4bn, compared to SGD4.7bn at end-4Q16, with projects across drilling and non-drilling solutions.
YTD, the company has secured SGD75m of orderbook replenishment coming from the offshore platforms and floating solution segments. This SGD4bn orderbook excludes the Sete Brasil drillship contracts which are valued at SGD3.1bn, as that project has been postponed for the time being.
We estimate Sembcorp Marine would be able to at least add another SGD500m to its orderbook in FY17.

As oil prices continue to trade in the USD50-55/bbl band, demand for drilling solutions is weak to almost non-existent.
On a more encouraging sign, Sembcorp Marine mentioned that enquiries for non-drilling solutions, offshore platforms and floaters have started to pick up. We expect orderbook replenishment to continue to be slow in FY17 and could start to pick up in FY18 if the oil price continue to stabilise.

We expect the 1Q17 core loss to be reversed in the coming quarters as the floater issue is rectified, as well as with continued progress for its projects in hand.
We lower our FY17F-18F earnings by 14-11% respectively, as we adjust our margin assumption for its non-drilling solutions.
Our higher TP of SGD1.65 is now based on 1.3x P/BV (from 15x FY17F P/E previously), on par with Sembcorp Marine’s average P/BV before the crude oil price rally in the early 2010s.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-04-28

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.65 Up 1.460