Sembcorp Marine (SMM SP) - UOB Kay Hian 2017-10-05: No Bottom Line Impact From Oro Negro Termination

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine (SMM SP) - No Bottom Line Impact From Oro Negro Termination

The recent termination of the Oro Negro contracts should have no impact on Sembcorp Marine (SMM)’s bottom line in the coming quarters.
As a re-iteration, profits recognised on the rigs were reversed out in 3Q15 and revenue recognition was halted. With uncovered cash costs on each rig representing a c.35% discount to original contract value, it is likely that no further write-downs are needed.

Sembcorp Marine (SMM) announced that it had terminated the contract for three rigs with Oro Negro on 4 Oct 17. The termination was based on terms of the deferment agreements between PPL Shipyard and Oro Negro.

SMM had in its 3Q15 results, reversed out the profits on 5 rig building contracts: 2x from Perisai Petroleum, and 3x from Oro Negro. In addition, SMM had prudently stopped revenue recognition on these projects. As such, we do not expect any bottom line impact from the contract termination.
The same could be said for the Perisai contract termination, announced in end-Aug 17.

Each Oro Negro rig is estimated to have an uncovered cash cost of US$136m. This reflects a 35% discount from its original contract value of US$209m per rig. SMM may have further written down the rig value when it provided another S$280m for its problematic rig contracts in 4Q15.

Recent transactions see discounts to the original contract price of 20-45%, with Keppel recently transacting its Transocean rigs for an implied c.US$170m per rig, a 21% discount to original contract price.

Our earnings estimates remain unchanged from our earnings revision earlier this week. (See report: Shipyard – Singapore - Don’t Hold Your Breath On The Oil Price Rally)
As a reiteration, our revised 2017-19 earnings estimates are at S$87m (unchanged), S$123m (-22%) and S$126m (-27%) respectively.

Our target price was earlier revised to S$1.77, pegged to a 1.3x 1-year forward P/B benchmark.
Despite the improving oil price outlook, capital budgets for offshore production contracts remain subdued and challenging to bid for. Contract wins might fall short of the annual S$4b-5b in contract wins the new yard was designed for.
With no visible earnings catalyst, it remains a trading play to oil price and we maintain our HOLD rating. Entry price: S$1.60.

Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-05

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.770 Same 1.770