Sembcorp Marine - OCBC Investment 2018-04-26: Buoyed By Scarcity Premium

Sembcorp Marine - OCBC Investment 2018-04-26: Buoyed By Scarcity  Premium SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Buoyed By Scarcity Premium

  • 1Q net profit 8% of full year cons.
  • P/B not justified by ROE.
  • Only large cap O&G pure play.

1Q net profit was 8% of cons. FY18 estimate

  • Sembcorp Marine (SMM) reported a 58.3% y-o-y rise in revenue to S$1.18b but saw an 85.7% fall in net profit to S$5.3m in 1Q18. 
  • Results were significantly below ours and the street’s expectations, with 1Q net profit accounting for 7% and 8% of ours and the street’s full year estimate, respectively. 
  • Based on current secured orders, work volume for the foreseeable quarters is expected to remain low, and management stated that the trend of negative operating profit may continue.

Is current P/B fair based on forecasted ROE?

  • Post the release of FY17 results in Feb, analysts have lowered their earnings forecasts, and consensus estimates of forward ROE are now 2.3% for FY18 and 3.7% in FY19 respectively. There is a risk that these may be further lowered after the release of 1Q results yesterday. 
  • The stock is currently trading at around 1.9x P/B, and the last two times this happened were in early 2015 and Apr 09 when ROE was between 20-30%. 
  • For ROE to return to 20%, we estimate net profit has to revert to at least S$500m, which is unlikely even if we were to assume new orders of S$5b this year, as time is required for revenue to be booked for a unit under construction.

Market likely ascribing a premium due to scarcity value

  • Despite the above, SMM is the only large cap oil and gas pure play in the Singapore space and hence a likely favourite for investors wishing to gain exposure to rising oil prices. 
  • SMM's share price has been sensitive to oil price movements but at current price levels we think most of the positives have been priced in – we are expecting new orders of S$3b this year and next, which we believe is similar to consensus. Even with estimates of S$4b or more, this still does not justify higher P/B valuations as explained above. 
  • Based on 1.75x FY18/19F book value, we derive a fair value estimate of S$2.10 on the stock.

Low Pei Han CFA OCBC Investment | http://www.iocbc.com/ 2018-04-26
SGX Stock Analyst Report HOLD Maintain HOLD 2.10 Up 2.070