Sembcorp Marine - CIMB Research 2017-10-04: Can SMM Fetch US$145m Per Jack-up?

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Can SMM Fetch US$145m Per Jack-up?

Sembcorp Marine (SMM) had provided for the profit recognised for the three Oro Negro rigs that it recently terminated. The provision was made in 3Q15 so earnings are not affected.
To date, SMM has six jack-up rigs that have been terminated – one from Marco Polo, two from Perisai and two from Oro Negro.
We estimate SMM will be able to sell the rigs with no loss for US$145m each, assuming EBIT margin of 15% and 20/80 payment terms.

3Q17 preview: likely qoq margin improvement with the absence of 2Q17’s S$34m forex losses and better cash flow from the receipt of Cosco divestment proceeds.
Maintain Add and target price, still based on 1.5x FY17F P/BV, the average trading band in 1996-2003, a period of weak oil prices and pre-rig boom.

Sembcorp Marine (SMM) has terminated three contracts with Oro Negro for the building of three jack-up rigs. The rigs have been technically accepted by Oro Negro but delivery of the rigs has been deferred from 2015.
In 3Q15, SMM reversed the profit for the three rigs, together with two other rigs recently terminated with Perisai. The amount of reversal was not disclosed but it had caused the EBIT margin to dip from an average of 11-12% to 6.6% in 3Q15.
The Oro Negro rigs were awarded in Jul 13 for a total contract value of US$634m, with 20% downpayment.
Oro Negro started to restructure its debt in 2015 following defaults on bond repayments.

With the 20% collected and assuming an EBIT margin of 15%, we believe SMM will be able to sell the rigs at no loss for US$145m each.
With oil prices hovering above US$50/bbl, sentiment in the E&P scene could be slightly improved, although global supply of completed rigs is still in a surplus state.
Keppel O&M novated five Super B rigs to Borr Drilling for US$216m per rig, which spells hope for SMM to still sell the terminated rigs at slight profits.

Sembcorp Marine (SMM) will release its 3Q17 results on 31 Oct after trading hours.
The Brazilian real strengthened 4% qoq against US$. This could result in a positive revaluation of a US$ loan kept in SMM’s Brazilian book that had mainly caused the forex loss of S$34m in 2Q17.
Assuming no forex loss/gain, the EBIT margin could recover to c.9%. Net profit with no forex impact was likely c.S$33m. 2Q17 net profit was S$5.6m, affected by the S$34m forex loss and S$5.5m provision made for a JV.
Rig building revenue was likely stronger qoq from the execution of US$145m hull carry over works for Tupi/Petrobras P68 FPSO as well as Kaombo FPSO work (due for delivery at end-17). Ship repair likely remained flat qoq.
We expect net gearing to improve slightly from 2Q17 (1.8x) as SMM received S$220m proceeds from the Cosco divestment recently.
Downside risks could come from order delays. Sale of terminated rigs and order winds are key catalysts.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-10-04

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