Sembcorp Marine - CGS-CIMB Research 2018-10-25: Short-Term Pressure Remains


Sembcorp Marine - Short-Term Pressure Remains

  • Sembcorp Marine’s share price could trend weaker in the near term as 3Q18 net loss of S$29.8m was wider than our S$20m-25m .
  • YTD order win at S$960m and management expects more orders by end-18 although no clarity on timeline for Gravifloat, Rosebank and Seaone projects.
  • Ship repair is the only growth division with more work expected from ballast water management.
  • Maintain ADD but lower Target Price to S$2.46 from S$2.52.

The stock in a nutshell

  • We think Sembcorp Marine’s share price is likely to remain weak in the near term with 3Q18 losses of S$29m albeit this is an improvement from 2Q18’s S$55m loss. 9M18 losses of S$80m was worse than our expected S$70m.
  • The lack of sizeable orders and timeline update from Gravifloat, Rosebank and Seaone projects could also dampen investors’ confidence.
  • The positive is that management expects more orders before end-18 and is hoping for a better 2019. We believe Sembcorp Marine can achieve better operating leverage in FY19 with more progressive recognition for the three key FPSO contracts won (Statoil Johan Castberg, Shell Vito FPU and Technip Karish & Tanin).
  • Our ADD call is on a 12-month basis with orders and losses bottoming out by FY18 as catalysts.

EBIT losses weak but to get better with more milestone progress

  • Reported EBIT margin improved from -3.2% in 2Q18 to S$27m one-off loss for the completion of the West Rigel EBIT margin deteriorated slightly from 2Q18’s -1.6% orders secured while waiting for the FPSO/FPU projects mentioned above to reach meaningful revenue recognition.
  • In 3Q18, floaters’ revenue from these projects grew to S$33, +66% q-o-q, thanks to the initial recognition of Technip’s S$476m in Mar 18.
  • We now expect FY18F EBIT margin of 0% previously. Management also expects the negative in 4Q18F.

Ship repair better q-o-q, hoping for more ballast water work

  • Revenue for ship repair grew 4% q-o-q and 6% y-o-y to S$131m in 3Q18, with higher value per vessel of S$1.82m vs. c.S$1.30m in 1H18, thanks to a better product mix.
  • YTD, Sembcorp Marine has serviced 21 LNG carriers. The Favoured Customer Contract agreement with Norwegian Solvang ASA was signed in early Oct 18 to repair its fleet of 26 LPGs. Under the agreement, Sembcorp Marine is the exclusive partner yard for the refits of their vessels in Singapore, including all related ballast water management systems installations and scrubber retrofitting work.
  • We expect ship repair revenue to grow 5% and 11% to S$493m in FY18F and S$549m in FY19F, respectively.

Taming 2018 orders to S$1.5bn from S$2bn, lower Target Price to S$2.46

  • We keep S$3.5bn EPS cut by 1619% for FY18F-20F to weaker margin and orders. 
  • With our EPS cuts, our Target Price is lowered to S$2.46 (from S$2.52), still based on 22x CY18F P/BV (5-year average).
  • Downside risks are oil price plunge and cost overrun.

LIM Siew Khee CGS-CIMB Research | 2018-10-25
SGX Stock Analyst Report ADD MAINTAIN ADD 2.46 DOWN 2.520