Sembcorp Marine - DBS Research 2018-04-26: Contract Win Is The Key

Sembcorp Marine - DBS Vickers 2018-04-26: Contract Win Is The Key SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Contract Win Is The Key

  • 1Q18 earnings still in the red excluding impact from new accounting standard.
  • Expect operating leverage to improve with higher contract wins.
  • Contract wins and earnings recovery are critical share price drivers.
  • Reiterate BUY; Target Price S$2.90.



Maintain BUY and Target Price of S$2.90, based on 2.4x FY18 P/BV (0.5SD below mean). 

  • We favour Sembcorp Marine (SMM) as a key proxy to the recovery in the O&G and O&M sectors, with strong order wins as key re-rating catalyst. This should lift SMM’s share price closer to our current Target Price and further re-rating will be driven by earnings recovery. 
  • 1Q18 remains in the red given the low activity level, which should be lifted with higher contract wins. 


Where we differ: More bullish on SMM’s contract wins. 

  • Order wins, a critical leading indicator for earnings recovery, is set to rise in the next 12 months. We believe SMM’s strong order pipeline would translate into S$3bn or more in new orders in 2018, which may potentially include
    1. a semi-submersible production unit for Shell’s Vito at S$400-800m;
    2. a Gravifloat (SMM’s proprietary technology) modularised LNG exporting terminal for Poly-GCL at c.S$1bn; and
    3. two large Compressed Gas Liquid carriers for SeaOne Caribbean valued at S$800m in total.
  • YTD, SMM won S$476m new orders. 


Reactivation of Sete Brasil rig orders. 

  • The landmark deal to sell nine jackup rigs to Borr Drilling and the disposal of harsh environment semisubmersible rig West Rigel have eliminated the key concerns on SMM. 
  • The restructuring of customer Sete Brasil is also seemingly closer to a resolution, as Petrobras and Sete are reported to have struck a rig deal. Singapore rigbuilders are well-positioned to deliver two rigs each (which are in the advanced stages of construction) out of Sete Brasil’s existing 13 orders (c.S$1bn each). 



Valuation: 

  • Our target price of S$2.90 is based on 2.4x FY18 P/BV, pegged to 0.5SD below its mean valuation since 2004. 
  • SMM’s book value has already been written down after the massive S$609m provisions taken in FY15. 


Key Risks to Our View: 

  • Key downside risks are sustained low oil prices which would affect rig count and new-building activities, execution risks in new product types, and corruption allegations in Brazil that, if found guilty, could lead to financial and reputational loss. 
  • Upside risk could come from privatisation or M&A activities, as well as the write-back of provisions from successful deliveries or vessel sales.



WHAT’S NEW - 1Q18 earnings supported by new accounting standard


1Q18 recorded revenue growth.

  • Headline revenue grew 76% q-o-q to S$1.2bn and bottomline swung into the black with net profit of S$5.3m in 1Q18, from net loss of S$33.8m a quarter ago. This was largely aided by the reinstatement of income for a jackup rig delivered to BOTL Lease during the quarter based on the new accounting standard. 
  • Excluding this effect, revenue growth would have been 28% q-o-q to S$858m with loss of ~S$33m (including forex loss of S$9m).

Expect gradual earnings improvement.

  • In its outlook statement, management guided that overall improvement in sentiment and offshore capex will take time translate to new orders, meanwhile, SMM could remain in operating losses at current low activity level. 
  • We maintain our forecast for now. We had expected SMM to continue to incur some losses in 1H18 as revenue is likely to remain low until major projects start to kick in, which will take 1-2 quarters to start being recognised. 
  • Hopefully, some of the cost overruns for disputed variation orders in 2017 could be recouped this year and better economies of scale from higher activity should be realised towards 2H18.
  • Orderbook stood at S$7.71bn, as at Mar-2018, of which c.42% or S$3.2bn is from drillship projects with Sete Brasil. The order book should largely be recognised in the next two years.
  • Net gearing hovered around 1.1x, similar to a quarter ago. Following the US$500m deposit in 4Q17, Borr Drilling has up to five years to pay the outstanding amount total ~US$800m from delivery date.






Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2018-04-26
SGX Stock Analyst Report BUY Maintain BUY 2.900 Same 2.900



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