Sembcorp Marine - CGS-CIMB Research 2018-10-18: Where Are We In The Cycle?


Sembcorp Marine - Where Are We In The Cycle?

  • We hosted Sembcorp Marine’s management in London and Paris last week. “Where are we in the cycle?” was the top question asked.
  • We concur with management that offshore sector is in a recovery, albeit, the initial stage. We think 2018 orders could miss consensus S$2bn- 3bn target.
  • Management expects better FY19 for orders, balance sheet and margin. 
  • Maintain ADD and unchanged 12-month Target Price of S$2.52.

Where are we in the cycle?

  • We concur with Sembcorp Marine’s management that the offshore newbuild sector has commenced a recovery but is in the initial stages. We think this is similar to the early cycle seen in 2003- 2004 when the utilisation of rigs in demand was c.70%. High-spec jack-up rigs were commanding c.US$65k/day and mid-water floaters c.US$80k.
  • Today, similar in demand premium class of jack-up and floaters are commanding c.US$95k/day and US$130k/day. This represents a 50-60% discount from the last peak in 2014 before the oil price crash.

Another 18 months’ wait, at least

  • With 114 units of undelivered rigs across global yards, it is known that few newbuild jack-up rigs will be ordered in the next 18 months.
  • In 2003, without excess supply, it took the sector a total of 24 months to see a 40% compounding increase in day rates which spurred newbuild activities. There could be some mid-water floaters orders in the next 12 months, but we expect only a handful.
  • YTD, only one unit was ordered by Awilco.

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Rosebank could be delayed

  • With the change in 40% ownership from Chevron to Equinor (Statoil), we think the project is likely to be delayed, assuming the transfer is completed in 2019. We also do not rule out tender resubmission by Equinor.
  • Sembcorp Marine has performed FPSO work for Equinor which could give the yard advantage over DSME. Management reaffirmed that technicality and pricing are key criteria. Financing and payment structure are not a consideration.

S$1bn-1.5bn of orders more realistic

  • Discussions on the Gravifloat project continues, but no clarity on the timeline. Therefore, we think Sembcorp Marine may not meet our S$2bn and market’s S$2bn-3bn order target for 2018.
  • We think S$1bn-1.5bn could be more realistic. On a S$1bn order assumption for 2018, our earnings for FY19F-20F could be reduced by 6% p.a. We are leaving our numbers unchanged for now. YTD, Sembcorp Marine’s has only clinched S$730m of orders.

Borr Drilling rigs 8 out of 9 delivered, US$800m receipt upon charter

  • Sembcorp Marine’s has delivered eight out of nine Borr Drilling rigs, with final payment pending successful charter of the rigs (by 2019). With the deferred payment, interest income will rise in 2H18. 1H18 interest income was S$19m (+85% y-o-y).
  • Balance sheet to improve by 4Q18 with US$150m final payment for West Rigel semi-sub. Order wins could be a catalyst.
  • Our Target Price is based on 2.2x CY18F P/BV, its 5-year average.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-10-18
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