Sembcorp Marine - OCBC Investment 2017-11-01: Initial Signs Of Recovery In Industry

Sembcorp Marine - OCBC Investment 2017-11-01: Initial Signs Of Recovery In Industry SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Initial Signs Of Recovery In Industry

  • Net gearing to fall to 1.0x.
  • Broader market improving.
  • Hopeful of new orders.

Net profit of S$2.7m in 3Q17 

  • Sembcorp Marine’s (SMM) 3Q17 revenue fell 64.3% YoY to S$316.9m while bottom-line improved from a net loss of S$21.8m in 3Q16 to a net profit of S$2.7m in 3Q17. This brings 9M17 net profit to S$47.9m vs. our full year estimate of S$47.2m, within expectations. Recall that net profit for SMM was S$39.5m in 1Q17, S$5.6m in 2Q17 and S$2.7m in 3Q17. 
  • Previously recognised revenue for the two Perisai rigs were reversed in 3Q17, while revenue reversal for the three Oro Negro rigs will take place in 4Q17.

Drilling market gradually improving 

  • Oil prices have firmed slightly along its one-year price range of between US$46 to US$60/bbl, and with this encouraging trend, upstream oil and gas investment activities have started to show signs of improvement. 
  • In particular, oil majors are adapting to the lower oil price environment and better positioned to proceed with final investment decisions. Day rates and utilization levels for offshore drilling rigs have improved, while recent M&A activities among drilling companies, coupled with increasing secondary rigs sales are signs of an initial recovery in the drilling segment. Despite this, we still expect new orders to come mainly from the non-drilling segment as recovery in the drilling market will still take time.

Net gearing to fall to 1.0x

  • SMM continues to receive active enquiries for projects relating to floaters, production platforms, gas solutions and specialized shipbuilding. 
  • SMM is also in advanced discussions with several prospective customers relating to its Gravifloat technology and are hopeful that initial orders will materialise in the foreseeable year. 
  • Meanwhile, net gearing remained at 1.3x in 3Q17. The group has also received the US$500m payment from Borr Drilling; with this, net gearing will fall to 1.0x.
  • We roll our valuations to FY18, and increase our P/B from 1.6x to 1.8x, taking into account a gradually improving operating environment for the broader industry. As such, our fair value estimate rises from S$1.98 to S$2.26. Maintain BUY.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-11-01
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 2.26 Up 1.980