Sembcorp Marine - CIMB Research 2017-07-28: 2Q17: Forex Swing

Sembcorp Marine - CIMB Research 2017-07-28: 2Q17: Forex Swing SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - 2Q17: Forex Swing

  • Sembcorp Marine SMM's 2Q17 net profit of S$5.6m missed our S$30m profit forecast due to S$34m forex loss and S$5.5m provision for JV. Excluding these, net profit would have been a beat.
  • Brazilian real has recovered post end-Jun; this could be a positive swing for 3Q17. Management expects orders to be better than 2016 but not committing to S$2bn-3bn.(YTD:S$75m). 
  • We cut order target to S$1.5bn from S$2.5bn on conservative grounds. FY17-19F EPS reduced by 14-16% to account for order cuts and provision for JV.
  • Maintain Add and target price trimmed to S$1.87, still based on 1.5x FY17F P/BV.
  • Interim DPS of S$0.01 declared, representing c.46% payout.

The swing factors 

  • The forex loss was mainly due to revaluation of US$ loan kept in Brazilian books as the real plunged c.6% between end-Mar and end-Jun. Weaker US$ qoq also had an impact.
  • Real has since recovered; this could be positive for 3Q17 earnings. SMM had similar forex swings in 2Q16 and 4Q16. There was also a S$5.5m provision made for a JV under strategic review (no info disclosed due to sensitivity).

Ship repair the star with 33% qoq increase in revenue/vessel 

  • 2Q17 revenue declined 14% qoq and 28% yoy to S$656m, with lower recognition from offshore platform of S$172m (-43% qoq, -48% yoy) due to less LNG modification work in Batam. This was offset by stronger ship repair revenue of S$138m (+53% qoq, -5% yoy); 128 vessels were repaired in 2Q17 (1Q17:111 vessels). 
  • Revenue/vessel rose 33% qoq to S$1.08 in 2Q17, thanks to more repairs for cruise ships and LNG vessels. Revenue/ vessel could sustain in 2H17 with vessels scheduled for ballastable water treatment.
  • Excluding forex, EBIT margin would have been 9.5% Without the forex swing, EBIT margin would have been 9.5%. We believe this could be due to the strength seen in ship repairs, which typically fetch EBIT margin of c.20%. 
  • Including forex swing, 2Q17 EBIT margin was 4.3% (1Q17: 1.8%). We are keeping our 6.5% EBIT margin for FY17F, hoping to see a positive swing in forex.

Still waiting for orders 

  • There were no new orders added in 2Q17 with only S$75m of variation orders secured YTD. However, P68 hull order is closed to being finalised, adding US$100m to its order book. This is still lower than our original S$2.5bn order target. 
  • Management’s tone sounded less bullish and only guided for yoy improvement in orders (2016: S$320m). Gravifloat orders are still in the pipeline especially export terminal related (c.US$1bn). 
  • We cut our order target to S$1.5bn for 2017 and keep our S$2.5bn target for 2018F.

Balance sheet timing issue 

  • Net debt deteriorated to 1.3x in 2Q17 from 1.18x in 1Q17 on timing issues. Net gearing will be better in 2H17 with the proceeds of Cosco divestment (S$220m) and final receipts of Libra FPSO (S$200m) post-commissioning. 
  • Management is also hopeful of seeing sales of some jack-up rigs to relieve the pressure on the balance sheet. 
  • Still, there was an interim DPS of S$0.01 declared for 2Q17; this could use up c.S$21m of SMM’s cash.

Maintain Add and target price trimmed to S$1.87 

  • SMM said it is not in direct discussion with Sembcorp Industries (SCI) for any strategic reviews although the final decision still lies with SCI. Our target price is trimmed slightly as a result of the EPS cut.
  • We see key catalysts for the stock to still be dominated by order wins or sale of completed rigs. 
  • Downside risks to our call are weaker-than-expected orders and cost overrun provisions.

LIM Siew Khee CIMB Research | 2017-07-28
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.870 Down 1.880