Sembcorp Marine - UOB Kay Hian 2018-07-23: 2Q18 Continued Losses, Expect Breakeven Only In 2019

SEMBCORP MARINE LTD (SGX:S51) | SGinvestors.io SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - 2Q18: Continued Losses, Expect Breakeven Only In 2019

  • Sembcorp Marine reported a core loss of S$36m in 2Q18, below our and consensus expectations. Core operating margins remained negative but improved q-o-q. The loss was further exacerbated by the one-off loss from the sale of West Rigel, of which payment will be split between 2018 and 2019.
  • Net gearing climbed to 126% in 2Q18 from 114% in 1Q18.
  • We now expect a loss in 2018 and breakeven only in 2019. 
  • Maintain HOLD but cut target price to S$1.83. Entry price: S$1.73.



2Q18 RESULTS


Core net loss of S$36m, below expectations.

  • Sembcorp Marine (SMM) reported 2Q18 headline net loss of S$56m, which included the loss from the sale of West Rigel recognised during the quarter which was understood to be slightly more than S$24m.
  • Excluding the impact of the loss as well as other one-offs, core net loss was closer to S$36m. Results were below our and consensus expectations.

Core business showing signs of improvement.

  • Excluding the loss from the sale of West Rigel as well as revenue contribution from it and the 2x Borr rigs delivered in 2Q18, core EBITDA margin was estimated at 5% (1Q18: 2.6%). Low work volumes continued to see SMM having difficulty covering overheads, resulting in core EBIT margin of -3.5%.

Losses compounded by continued high gearing.

  • Net gearing climbed to 126% (1Q18: 114%, 4Q17: 113%), keeping net interest expense elevated at S$14.7m. Still, this represented a decline from 2016-17 which saw net interest expense peak at S$24m.
  • Elevated net interest expense is compounding the operating losses that are already plaguing Sembcorp Marine.

Partial proceeds from sale of West Rigel in 2018.

  • Sembcorp Marine will complete the receipt of cash proceeds in 2019 from the sale.

Lower repair volumes partially offset by higher value per vessel.

  • For 2Q18, 78 vessels were repaired (2Q17: 128, 1Q18: 80) with a repair value of S$1.62m per ship (2Q17: S$1.07m, 1Q18: S$0.98m). Sembcorp Marine continues to focus on high-value work from cruise ships and LNG vessels to offset the lower repair volume.

Total contract wins of S$730m in 1H18, net orderbook at S$4.15b.

  • The contract win value was primarily driven by the Shell Vito project, which was low due to owner- furnished equipment. Net orderbook excluding Sete Brasil was S$4.15b as of 1H18.
  • Sembcorp Marine continues to work on advancing the LOI for SeaOne Carribbean, which we understand is contingent on FID of the project. Rosebank is potentially on the horizon, and we understand the value to be higher than that for the Energean FPSO (~S$480m).

Sete Brasil drillships remain in discussion.

  • Sembcorp Marine continues to engage Sete Brasil on the details of the restructuring plan, and will make an announcement when appropriate. It re-iterated that provisions of S$329m remain sufficient.

No dividend for 1H18.

  • This compared to a 1 S cent dividend declared in 1H17.



STOCK IMPACT


Likely loss for 2018.

  • Despite the improving outlook for new orders, margins continue to remain thin. Even if Sembcorp Marine breaks even at the operating level, the elevated net interest expense will keep bottom line at a loss. Management shares this outlook, and has guided continued operating losses in the near term.

Breakeven only likely in 2019 at the earliest.

  • Improving core EBIT margins show that things are on the mend, albeit requiring a longer runway than originally expected. Management expressed that margins will continue to improve as more profitable projects get recognised.
  • We estimate Sembcorp Marine will need to reach core operating margin of 5% in order to break even at the PBT level assuming current revenue run rate of S$500m- 600m. The coming quarters will provide clarity on whether the current earnings momentum will continue, at which it would be more reasonable to turn positive on the stock.


EARNINGS REVISION


Core loss of S$76m in 2018.

  • We now expect a core loss of S$76m for 2018. For 2019- 20, our revised net profit estimates are S$2m and S$20m respectively. Contract win estimate for 2018 has also been reduced to S$2b.


VALUATION/RECOMMENDATION


Maintain HOLD but cut target price to S$1.83.

  • Our target price is now S$1.83, pegged to an unchanged 1.7x 2019F P/B (-0.5SD). Our valuation multiple is justified by the continued poor profitability.
  • Until more positive signs of recovery manifest itself, we keep our HOLD call.
  • Entry price is S$1.73.





Foo Zhiwei UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-07-23
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.83 DOWN 2.050



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