Sembcorp Marine Ltd - Phillip Securities 2017-07-31: Longer Than Expected Recovery

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine Ltd - Longer Than Expected Recovery

SMM's 1H17 revenue missed our expectation by 7.4% 1H17 Net profit substantially missed our expectation, mainly due to costs incurred for a floater project in 1Q17 suppressed gross profit in 1H17.
We downgrade our call to REDUCE with a lower TP of S$1.55, based on a blended 12- month forward PER of 28.5x. This implies a downside of 8.6% from the last close price.

+ Transocean requested the resumption of awarded contract works: The contract was for two drillship orders, and the delivery window is stretched to 2020.
+ Expenditures cut to maintain business: SMM decided to have further curbs on operating expenditure (Opex) in FY17. One of the measures to trim Opex is to freeze the wage across the board for all employees as well as to cut the 10% monthly variable component wage for senior management staff. In terms of capital expenditure (Capex), the Group generated S$98mn outflows in 1H17, compared to S$190mn in 1H16. It is expected to have S$50mn+ Capex for the remaining projects on the yard in 2H17. Moving forward, the Capex excluding the maintenance outflows will decline.

- No replenishment to order book: In 1H17, SMM secured only S$75mn worth of new contracts excluding repairs, compared to S$320mn in FY16. The net order book continued to shrink, arriving at S$6.7bn YTD, of which S$3.1bn is associated with Sete Brasil drillship contracts. There is no detailed update on current status of these projects. Nonetheless, Management expects the total amount of new contracts in FY17 to surpass that of FY16.
- Though the group had some enquiries for floating LNG projects earlier on this year, the progress in clinching orders had been slow so far.

SMM’s cost cutting measures will enable the Group to alleviate the pressure from the weak operating environment in the near term. However, we believe it will take time for the group to replenish the order book as well as get more work flows coming in.
The weak performance may continue into 2H17.

We revise down the FY17e EPS from previous 6.6 SG cents to 5.4 SG cents, due to weaker than expected performance in 1H17.
Based on updated blended forward 12-month PER of 28.5x, we derive an updated TP of S$1.55 (previous TP: S$1.58). This implies a downside of 8.6% from the last done price of S$1.695, and we downgrade our call from NEUTRAL to REDUCE

Chen Guangzhi Phillip Securities | http://www.poems.com.sg/ 2017-07-31

Phillip Securities SGX Stock Analyst Report REDUCE Downgrade NEUTRAL 1.55 Down 1.580