Sembcorp Marine - CIMB Research 2018-02-21: Kitchen Sinking 4Q17, Corporate Actions Ahead?

Sembcorp Marine - CIMB Research 2018-02-21: Kitchen Sinking 4Q17, Corporate Actions Ahead? SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Kitchen Sinking 4Q17, Corporate Actions Ahead?

  • Sembcorp Marine's 4Q17 net loss of S$34m was wider than our forecast and consensus. FY17 net profit of S$14m was 21% of FY17F mainly due to kitchen sinking for floaters (FPSO/FSO).
  • Order enquiries are more positive now vs. 6 months ago. It closed c.S$970m of new orders in 2017. We up our order win target to S$3bn for FY18-19F (from S$2.5bn p.a).
  • 4Q17 net gearing improved to 1.1x (9M17:1.3x). This could reduce further to 0.7x with the full payment from Borr Drilling, but it may be negated slightly by higher capex.
  • Maintain ADD with a higher Target Price of S$3.01, now based on 20-year average of 2.5x P/BV. 

Kitchen sinking floaters 

  • Sembcorp Marine's gross loss S$48m in 4Q17 was a surprise to us. Management blamed it on weak operating leverage, negative variation order and cost overrun for delivered and existing floaters (FPSO/FSO). Some of the costs are pending finalisation with customers. 
  • We estimate Sembcorp Marine incurred c.S$80m of kitchen sinking costs. This is buffered by S$32m of write-back for the sale of 9 jack-up rigs to Borr Drilling which had cost write-down of c.S$12m in 3Q17. 
  • 4Q17 EBIT losses were S$43m buffered by S$25m forex-related gains.

What’s a normal operating margin? 

  • We received no guidance from management, but believe this is largely based on order win momentum. 1H18 operating margin may still be weak. With orders streaming in and potential write-back from the kitchen sinking exercise, we expect margins to improve in 2H18. 
  • Note that sometime in FY18, there will be a write-down of S$24m for the successful sale of semi-submersible, West Rigel. Our FY18 EBIT margin is at c.6.7% (FY17%: EBIT loss), FY16:6.4%).

Order outlook better than six months ago 

  • Order enquiries are more positive but the operating landscape is competitive. We think margins on new projects could be compressed to be comparable with the Korean yards. However, we up our order expectations to S$3bn p.a. for FY18-19F in view of improved enquiries. 
  • Sembcorp Marine has two outstanding Letters of Intent (LOI) - Shell Vito floating production unit (we estimate US$300m-400m) that may finalise in 2018 and SeaOne for two large compressed gas liquid carriers (we estimate US$500m), likely to be finalised in 2019.

Balance sheet has improved but may be negated slightly by capex 

  • A final DPS of S$0.01 was announced, bringing total FY17 DPS to S$0.02. 
  • Net gearing improved to 1.1x from 1.3x in 3Q17, thanks to the receipt of US$500m from Borr Drilling. There were also milestone receipts for some projects in Jan 18 amounting to c.S$200m.
  • Borr Drilling has taken delivery of two vessels to-date but has made no payment yet. Assuming all proceeds (c.US$750m) are in by 2019, Sembcorp Marine’s net gearing could improve to 0.7x. This, however, may be negated by higher capex.

Why capex now? 

  • Management guided that capex for FY18 is likely to be slightly higher than FY17’s (S$178m) but below S$500m. Capex will be incurred for the development of Tuas yard (partial phase 3). It has spent c.S$1.7bn to develop Tuas phases 1 and 2 since 2010.
  • The capex quantum is correlated to the potential orders in the pipeline, to enhance capabilities, automation process and cost saving needs. Cash call could be a risk for this.

Maintain ADD, raise target price to S$3.01 

  • Our EPS forecasts for FY18-19F are cut by 18-30% to incorporate the cost write-down for West Rigel and lower margin expectations, offset by higher order win expectations. 
  • Key catalysts include:
    1. corporate action by Sembcorp Industries, and
    2. higher-than-expected order wins.
  • Management said the Gravifloat order is ‘nearing’ finalisation. 
  • Our Target Price is now based on 2.5x FY18 P/BV, or at its 20-year average. 
  • Downside risks:
    1. no corporate action by Sembcorp Industries,
    2. oil price crash, and
    3. a rights issue.

Ship repair may spike in 2019 

  • Sembcorp Marine (SMM) repaired 390 vessels in FY17 with an average repair value/vessel of S$1.21m, higher than the S$0.98m in FY16. This was helped by the repair of 16 cruise ships. Ballast Water Management Convention has been deferred by two years to 2019. This could cause a delay in the spike of work to 2019 instead of 2018. 
  • For FY18, the average repair value/vessel is likely to remain largely unchanged from FY17’s, supported niche-market cruise ships repairs.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-02-21
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