Sembcorp Marine - OCBC Investment 2018-02-22: Will It Live Up To Expectations?

Sembcorp Marine - OCBC Investment 2018-02-22: Will It Live Up To Expectations? SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Will It Live Up To Expectations?

  • S$33.8m net loss in 4Q.
  • Market likely ascribing premium to corp action.
  • More new orders but uncertain margins.

S$33.8m net loss in 4Q17; immediate outlook challenging 

  • Sembcorp Marine (SMM) reported a 21.1% y-o-y fall in revenue to S$655.0m and a net loss of S$33.8m in 4Q17, bringing full year net profit to S$14.1m. 
  • However this was boosted by one-off items such as disposal gains and inventories and work-in-progress written back in 4Q17. Excluding these, we estimate core net loss of about S$70m for the full year, below expectations. 
  • Despite signs of improvement with regards to global E&P capex spending, management stated that “the immediate outlook remains challenging” and it will “take some time for capex spending to translate into new orders”. In particular, competition for orders remains intense.

At 2.1x P/B, is market expecting ROE to revert to 20% levels? 

  • We note that consensus estimates of forward ROE is 3.5% for FY18 and 5.0% for FY19. Yet the stock is currently trading around 2.1x P/B, and the last two times this happened were in
    1. early 2015 when estimated forward ROE was ~20%, and
    2. 1Q09 when estimated forward ROE was ~27%. 
  • However, if we were to look at oil price as another indicator instead, we find that in early 2015 when SMM’s stock traded at 2.0x P/B, Brent crude was also around US$65-70/bbl, which is close to current levels. Hence current valuations may be justified by expectations of higher oil prices, but will this translate to ROEs of at least 20% that we saw in previous times when the stock traded at 2.0x P/B? 
  • We are expecting better new order flows as the industry recovers, but there is still uncertainty with regards to margins, which will only be apparent when SMM starts profit recognition. As such, we believe the market is ascribing a premium to potential corporate action. 
  • Meanwhile, all eyes will be on the results announcement by Sembcorp Industries on Friday morning, when there is expectation that an update on the strategic review will be shared. 
  • We roll forward our valuations to blended FY18/19F book, and our fair value estimate is tweaked from S$2.37 to S$2.43. Maintain HOLD.

Low Pei Han CFA OCBC Investment | http://www.iocbc.com/ 2018-02-22
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 2.43 Up 2.370