Sembcorp Marine (SMM SP) - UOB Kay Hian 2018-04-26: 1Q18 Orderbook Outlook Improving; Profitability Lacking

Sembcorp Marine (SMM SP) - UOB Kay Hian 2018-04-26: 1Q18 Orderbook Outlook Improving; Profitability Lacking SEMBCORP MARINE LTD S51.SI

Sembcorp Marine (SMM SP) - 1Q18 Orderbook Outlook Improving; Profitability Lacking

  • Sembcorp Marine (SMM) reported net profit of S$5.3m largely on adoption of SFRS(I). Otherwise, underlying net loss was at S$33m.
  • Management expects operating losses for the next few quarters based on its current orders.
  • Net gearing remained flat at 1.14x, while net orderbook increased to S$7.71b. Valuations seem stretched given the lack of profitability and elevated gearing.
  • Tweak 2018-20 earnings forecasts by 0-3%. Maintain HOLD, with a higher target price of S$2.05. Entry price: S$1.90.



RESULTS

  • Sembcorp Marine (SMM) reported an underlying net loss of S$33m, below expectations. The reported net profit of S$5.3m was largely due to the adoption of SFRS(I) starting 1 Jan 18. Based off the pre-SFRS(I) net loss figure, results was a miss against our and consensus earnings forecasts. Management remarked that based on its current secured orders, it expects operating losses to continue for coming quarters.
  • Construction operating margin rose to 1.5%. This was a reversal from a loss of -6.7% in 4Q17. The margin improvement was attributed to lower provisions. It remained weak due to low work volumes and a lack of operating leverage.
  • Net gearing flat at 1.14x, unchanged against end-17. Net gearing remained stable at 1.14x for 1Q18, as compared to 1.13x in 4Q17. This was a slight disappointment as we had expected an improvement in net gearing, but recognise that SMM is currently also financing the rig orders for Borr Drilling.
  • Net orderbook stood at S$4.59b. Excluding the Sete Brasil rigs, net orderbook was S$4.59b 2017: S$4.45b), higher due to the award of the TechnipFMC FPSO hull and living quarter contract secured in Mar 18. Deliveries stretch into 2020. LOI for Shell Vito is expected to translate into a firm order soon on Shell’s decision to proceed with the project. The LOI with SeaOne Caribbean remains in progress, while Gravifloat discussions have reached advanced stages and will hopefully translate into initial orders.
  • Sete Brasil drillships remain in discussions. SMM continues to engage Sete Brasil on the details of the restructuring plan, and will make an announcement when appropriate. They re-iterated that they believe provisions of S$329m remain sufficient.
  • Working on strategic alliances/partnerships to maintain repair margins. Vessels repaired for 1Q18 was at 80 units (1Q17: 111 units). Value per vessel was higher at S$0.99m (1Q17: S$0.81m). SMM sees higher competition but plans to mitigate this by entering strategic alliances/partnerships to maintain repair margins.


STOCK IMPACT


Valuations not supportive of current financial performance.

  • Valuations remain stretched in our view. SMM continues to be a play on the orderbook recovery from higher oil prices. Even if new orders continue to be secured at average historical EBIT margins, it will take at least a year before these orders kick in. 
  • Meanwhile, SMM’s profitability is challenged as they worked through the 2016-17 orders that were secured at lower than average EBIT margins. Continued operational losses will erode the book value per share, directly translating to valuations falling over time. 
  • Balance sheet is slowly improving, but the continued high gearing does not warrant a P/B revaluation to historical mean.


EARNINGS REVISION

  • Adjust 2018-20 earnings forecasts by 0-3% on inclusion of TechnipFMC order. Our earnings estimates for 2018-20 are lower by 0-3% as we adjust for timing and margins on inclusion of the TechnipFMC FPSO order. 
  • We have revised our 2018-20 earnings estimates to S$27m (-3%), S$77m (-2%) and S$103m (0%) respectively.


VALUATION/RECOMMENDATION


Maintain HOLD, target price revised to S$2.05.

  • We tweak out 2019F P/B to 1.7x, representing -0.5SD of SMM’s long-term P/B mean. 
  • Our target price has been raised to S$2.05. 
  • We remain neutral on SMM’s positive orderbook outlook, and await signs of earnings improvement before turning positive. Maintain HOLD.





Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-26
SGX Stock Analyst Report HOLD Maintain HOLD 2.05 Up 1.900



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