Sembcorp Marine - DBS Research 2017-07-28: Stay Tuned For Order Recovery

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SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Stay Tuned For Order Recovery

• Stripping out forex losses, core profit would have been S$38m and EBIT margin would have climbed to 9.6%.
• Management remains positive on order wins; FPSO enquiries picked up.
• An interim dividend of 1Sct was declared Reiterate BUY; TP S$2.30.

Maintain BUY; TP S$2.30, based on 1.8x FY17 P/BV (1SD below mean). 

• Stripping out forex losses in 2Q17, SMM saw EBIT margin rebound to 9.6% and PATMI inch up to S$38m,. We continue to see rerating catalysts stemming from: 
  1. SMM as a pure play to ride the oil-price recovery towards 2H; 
  2. sizeable new orders for non-drilling solutions, in particular FPSOs and Gravifloat’s modularised LNG terminals; 
  3. the conclusion of jackup sales; 
  4. the reactivation of Sete’s projects; and 
  5. SMM being a potential M&A play arising from a consolidation of Singapore yards.

WHAT’S NEW

2Q showed sequential improvement 

• SMM reported headline net profits of S$5.6m, though this was mainly due to large FX losses of S$34.3m - on the revaluation of the Brazilian yard’s liabilities denominated in US dollar to Brazilian Real, as well as revaluation of other assets and liabilities from USD to SGD. Without the FX loss, net profit would have come in at c.S$40m – more or less flat q-o-q.

EBIT margin up from 1.8% in 1Q17 to 4.3% this quarter.

• Stripping out the FX losses, the improvement would have been more pronounced, with adjusted EBIT margin at 9.6% for 2Q17.

YTD order wins at S$75m, but management expects 2017 total wins to surpass 2016’s quantum. 

• While order wins so far this year have been lackluster, management expressed optimism that the full-year orders would come in above 2016’s S$320m secured, although we note that this forecast may include a variation order on one of the Petrobras FPSOs worth > US$100m. 
• We believe SMM’s Gravifloat LNG terminals provide a unique modular option to customers, and will be the key driver of order wins in the near term. The value of these units can range from S$200-$300m for importing LNG terminals, and up to c.S$1bn for exporting LNG terminals.

Interim dividend of 1.0Scts declared (vs. 1.5Scts interim last year). 

• This translates to a payout ratio of about 46% for 1H16. We believe SMM intends to maintain its dividend payout policy (and assume full-year dividend of 2.5Scts].
• Lower gearing upon receipt of the proceeds of the divestment of a 30% in Cosco Shipyard Group should provide some comfort in terms of balance sheet/cashflow management with respect to continued dividend payouts.

Where we differ: more bullish on SMM’s contract wins. 

• We expect sizeable contracts for LNG solutions to come through in the next 6 months. Order wins, a critical leading indicator for recovery, is set to rise next year with several modularised LNG terminal contracts in the pipeline, each ranging from S$200m- $300m (for importing LNG terminals) to c.S$1bn (for exporting LNG terminals). We expect these to drive SMM’s order wins to the S$2bn mark. SMM has been reportedly in final talks with Chinese conglomerates Poly Group and GCL Group for LNG solutions, as well as Global LNG for a gigantic LNG vessel. This will buck the declining order-book trend, which dipped to S$3.6bn (excluding S$3.12bn Sete orders) in 2Q17.

Disposal of undelivered jackup rigs. 

• SMM has seven outstanding jackup rig orders, which are all at advanced stages of construction. Besides the BOT Lease unit, which will likely be delivered to its customer next year, SMM is in talks with several potential buyers for the five undelivered jackup rigs ordered by financially distressed Perisai and Oro Negro, and one rig terminated by Marco Polo. We believe these rigs have been marked down by c.30% through the provisions made in 4Q15.
• The successful disposal of these rigs at breakeven price and above will free up capital and eliminate a key overhang on SMM.

Valuation

• Our target price of S$ 2.30 is based on 1.8x FY17 P/BV, in line with mean of below 1SD since 2004. SMM’s book value was already written down after the massive S$609m provisions in FY15.

Key Risks to Our View

• Key downside risks are sustained low oil prices which affect rig count and newbuilding activities, execution risks in new product types, and disposal of jackup rigs at a loss. 
• Upside risk could come from privatisation or M&A activities, as well as the write-back of the provisions from successful deliveries or vessel sales.

Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2017-07-28

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.300 Same 2.300