Sembcorp Marine - CIMB Research 2017-11-01: FY17F To Be Weak, Orders In Focus

SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - FY17F To Be Weak, Orders In Focus

Sembcorp Marine (SMM)'s 3Q17 net profit of S$2.7m missed our forecast due to S$12.7m loss from Borr’s rig sale and weak EBIT margin ex forex gain of 1.1%. 9M EPS at 38% of previous FY17F.
Rig building revenue will swing in the next five quarters with the delivery of nine Borr Drilling rigs. Profit impact will be neutral as losses have been recognised in 3Q17.

Net gearing unchanged qoq at 1.3x due to working capital from current projects.
Management expects net gearing of 1.03x post US$500m receipt from Borr.
FY17F has been a bad year; all eyes now on the potential orders in the pipeline.
We cut our FY17-19F EPS on lower EBIT margin; TP dips to S$2.49, still 2x FY18F P/BV.
Maintain Add on the back of order hope in FY18F. Oil price crash a key risk.

3Q17 revenue declined 52% qoq and 64% yoy to S$327m as rig-building plunged 93% qoq to S$21m, as a result of c.S$300m of revenue reversal for two cancelled Perisai jack-up rigs (JUs).
SMM guides for more revenue reversal in 4Q17, for the three Oro Negro JUs cancelled in Oct 17.
In addition, SMM will recognise the revenue for nine JUs sold to Borr Drilling on the % of completion and delivery up to 1Q19. Six of the rigs are largely completed, with three spec-built units at c.50% completed.

The revenue recognition of Borr units will be neutral to profit as SMM has taken in the upfront loss of S$12.7m in 3Q17 on a lump-sum basis. Including this and forex gain of S$31m (vs. S$34m loss in 2Q17), EBIT margin was only 1%. We believe some of the existing first-time projects could have seen upfront provision of costs. Going ahead, we expect forex movement to be better controlled as SMM will change the functional currency of its Brazilian operations into US$, to minimise US$/real swing on loans.

Net gearing was unchanged qoq at 1.3x in 3Q17 due to working capital from current projects. Management expects net gearing of 1.03x post US$500m receipt from Borr Drilling in 4Q17.
Working capital required to finish the Jus are minimal, funded by the proceeds from Borr. The remaining US$800m will be paid five years from each delivery.

We consider the 3Q17 ship repair revenue as steady at S$124m (-10% qoq). Average revenue per vessel was up to S$1.39m in 3Q17 vs. S$1.08m in 2Q17 on the back of improved vessel mix.
Overall sentiment for liquefied natural gas (LNG) carriers, floating production storage and offloading (FPSO) vessels and cruise ships remain positive.

Shell confirmed with Upstream that SMM will be awarded a contract covering both hull and topside of its Vito project, and their integration for a production semi-submersible.
The final investment decision (FID) is slated for early-2018. The unit has a capacity of 100k bbl/d of oil, and 8.8k tonne topside and 15k tonne hull. Benchmarked to Samsung’s US$1.3bn Mad Dog 2 platform win (58k tonne, 110k bbl/d of oil) would put this job’s worth at US$1bn. Winning this scores SMM major points given Shell's strict requirement.

Based on known tenders, we estimate SMM is gunning for US$6bn worth of sizeable and high-profile non-rig projects. We expect bad FY17F results due to weak operating leverage but the excitement will be in 2018F as order wins could be key catalysts.
We forecast S$2.5bn of orders in 2018F. YTD order win is only S$270m, excluding the S$1.77bn of Borr Drilling rigs.
Our TP basis is 20% discount to 20-year average of 2.5x.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-11-01

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