Sembcorp Marine (SMM SP) - UOB Kay Hian 2017-10-23: Emerges Victorious For Vito Project

Sembcorp Marine (SMM SP) - UOB Kay Hian 2017-10-23: Emerges Victorious For Vito Project SEMBCORP MARINE LTD S51.SI

Sembcorp Marine (SMM SP) - Emerges Victorious For Vito Project

  • Sembcorp Marine has emerged victorious for the Shell Vito project. It has secured both the fabrication and integration contracts for the project, beating its Korean and Chinese competition. No formal value was provided but total contract value is estimated at US$1.25b. 
  • Current pipeline of project implies S$1.2-1.9b secured for 2018. 
  • Positive catalysts outweigh downside risks and we maintain BUY with unchanged target price of S$1.90.



WHAT’S NEW


Secures c.US$1.3b Shell Vito contract. 

  • According to Upstream newspaper, Sembcorp Marine (SMM) has been confirmed as the winner of the Shell Vito production semisubmersible for both the:
    1. hull and topsides, and
    2. integration contracts.
  • Estimated capex for the project is US$1.25b (S$1.70b), according to Energy Maritime Associates (EMA). The fabrication and integration component is ~US$0.5b in our base case and US$1.0b in our bull case. 
  • SMM had beaten expectations by securing both contracts, as industry sources had widely believed that either the South Korean and Chinese yards would secure the hull and topside project instead.

Contract award likely to be in early-18. 

  • Shell has confirmed it will make final investment decision (FID) on the Vito project in early-18. Formal award will likely be announced then, despite the fact that it is understood that SMM and Shell have already commenced planning for the project. Vito is currently planned for a 2021 startup, so earliest delivery is likely to be in 2020.


STOCK IMPACT


Pipeline of contract wins for 2018 already implied at S$1.2-1.9b. 

  • Combined with SeaOne’s likely award in 2018, our contract win for 2018 is implied at S$1.2b in the base case and S$1.9b in the bull case (UOBKHe: S$1.5b for 2018). 
  • In any case, the development represents a positive for SMM’s share price and sensitivity analysis points to a target price of at least S$2.00 based on our P/B-ROE relationship. This assumes SMM does get the oft-cited US$1.0b Poly-GCL contract, with supposed FID in Oct 17.


EARNINGS REVISION


No change to estimates for now. 

  • We keep our estimates unchanged for now, as we await details on the actual size of the contract. Our contract win assumptions over 2017- 19 are kept unchanged at S$1.2b, S$1.5b and S$2.5b respectively, as we opt for a review closer to end-17, when there will be greater clarity.


VALUATION/RECOMMENDATION


Maintain BUY with an unchanged target price of S$1.90. 

  • Our target price remains unchanged at S$1.90, based on a conservative P/B-ROE that implies a 1.5x P/B. 
  • While visibility of higher contract wins remains clouded, SMM currently rests at an inflexion point where the likelihood of positive developments outweighs the negatives. The stable oil price outlook and its diversification into gas-related solutions position it only for more contract wins. 
  • Sete Brasil still presents a possible negative catalyst but should see limited downside risk due to:
    1. project was on milestone basis,
    2. provisions are likely sufficient, and
    3. recent transactions highlight that losses, if any, are likely small. 
  • Maintain BUY.


RISKS

  • Execution risks from existing orderbook and future orders.
  • Unforeseen impairment risks.




Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-23
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.900 Same 1.900



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