Sembcorp Marine - CIMB Research 2018-04-25: Near-term Margin Pressure

Sembcorp Marine - CIMB Research 2018-04-25: Near-term Margin Pressure SEMBCORP MARINE LTD S51.SI

Sembcorp Marine (SMM) - Near-term Margin Pressure

  • 1Q18 would have been a net loss of S$33m (below our expectations and consensus), excluding the adoption of the new accounting standards, SFRS (I) 15.
  • Ex-SFRS, EBIT margin narrowed q-o-q to -3.7% vs. -6.7% in 4Q17. Citing industry challenges, management guided for the possibility of negative operating profit ahead.
  • The near-term positive is the likelihood of a contract from the Shell Vito project which achieved FID. We estimate contract size to be c.US$300m-400m. YTD win: S$476m.
  • We adjust our EPS by 47-167%, factoring in EBIT losses in 2018 and lower our EBIT margin expectations in 2019-2020.
  • Keeping our ADD call but lower Target Price to S$2.52, based on 2.2x CY18 P/BV, its 5-year average (previously 2.5x on a long-term average).

SFRS effects lifted profit, minimal adjustments ahead

  • Sembcorp Marine 1Q18 reported net profit of S$5.3m, forming 8% of our full-year forecast and consensus due to the adoption of new accounting standards, SFRS (I) 15, for the delivery of a jack- up for BOTL in 1Q18 as the title was formally transferred. 
  • Revenue was boosted to S$1.18bn and profits previously recognised in retained earnings were reversed in 1Q18. Without this, 1Q18 revenue was S$858m with net loss of S$33m. 
  • There should be minimal adjustments ahead as the JU was the last unit with back-loaded payment.

Guiding for EBIT losses trend in the near term

  • Ex-SFRS effect, we estimate EBIT margin of -3.7% (4Q17:- 6.7%) as there were still some provisions for cost overrun, albeit lower than in 4Q17. 
  • For the first time, management guides for the possibility of negative operating profit in the next few quarters if there are no orders ahead, due to weak operating leverage. We think this trend will reverse depending on the timing of sizeable orders and recognition of the recently secured TechnipFMC hull (3Q18) living quarters order.
  • Settlement of variation orders could also reverse EBIT losses. Conservatively, we now expect EBIT losses in FY18.

Still hopeful on S$3bn orders, near term from Shell Vito

  • SMM has secured S$476m of new orders YTD, vs. our S$3bn target. 
  • We are likely to hear of the finalisation of the contract from Shell for the Vito project as it achieved FID (Final Investment Decision). SMM secured the Letter of Intent in Dec 17 for the building of the hull, topside and integration of the Floating Production Unit. We estimate the contract to be worth US$300m-400m. 
  • Order book stood at S$4.59bn as at end-1Q18.

Maintain Add with a lower target price of S$2.52

  • SMM's share price may retreat in the near-term given the expectations of weak core earnings. However, we believe a sustained oil price and contract wins could still keep interest in the stock. 
  • Catalysts could come from settlement of the sale of the West Rigel semi- submersible and stronger-than-expected order wins in 2018. 
  • Downside risks are weak order momentum and significant cost overrun on projects.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-04-25
SGX Stock Analyst Report ADD Maintain ADD 2.52 Down 3.010