Sembcorp Marine Ltd - Phillip Securities 2018-10-29: Protracted Weakness

SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine Ltd - Protracted Weakness

Sembcorp Marine's 3Q18 revenue and net loss exceeded our expectation due to an S$34mn loss on the sale of a semi-submersible.
Repairs and Upgrades segment secured a big contract.
Order flow, profitability and guidance remain weak.
We revised down our FY18e BVPS (from SG$1.1 to SG$1.0) due to the loss on the disposal and the lower margin assumption. Based on the 5-year average PBR of 1.6x, our revised Target Price is S$1.65 (previously S$1.78).
It is worth mentioning that the historical PBR low was around 1.0x. We upgrade our recommendation to NEUTRAL due to the recent price correction.

In Sep-18, Sembcorp Marine was awarded the biggest technology retrofits contract to date. The contract was granted by Maran Tankers for the installation of marine scrubbers and ballast water management system on 13 of the Greek owner’s vessels. With this contract, Sembcorp Marine has an order book of four marine scrubbers and 23 ballast water management system.
Revenue for this segment was S$336mn with a 5% y-o-y drop in 9M18. The average revenue per vessel surged by 35% y-o-y to $S1.46mn, offsetting the decrease in the number of vessels repaired.

Brent crude oil price averaged US$78/bbl (up 44% y-o-y) in 3Q18, which supported the recovery of upstream drilling activities. Management believed the capex on global exploration and production (E&P) would continue to improve. However, the over-supply of offshore rigs and vessels takes a longer time to generate new order flows in the sector.
Meanwhile, margins remain compressed due to intense competition. Management expects the trend of negative operating profit to continue for a few more quarters.

The net order book continues to decline (3Q18: S$6.4bn vs FY17 (restated): S$8.4bn). New contracts secured YTD came from Floaters segment, amounting to S$730mn (FY17 Floaters: S$911mn).
Though management is optimistic about the increasing enquiries of LNG projects, there is no contract announced so far.

It is encouraging that oil price was back to four-year high recently. However, we believe the sustainability of the current level (c.US$80/bbl) matters. Two key factors are directing the recovery of Sembcorp Marine, capex on E&P and vibrancy of upstream drilling and production activities (measured by charter rate and utilisation rate).
Since Sembcorp Marine’s business is order book- driven, we have not seen any evident signal that its profitability will turn around in the near turn. In a nutshell, the survival mode is still on.

We revised down our FY18e BVPS (from SG$1.1 to SG$1.0) due to the loss on the disposal and the lower margin assumption. Based on the 5-year average PBR of 1.6x, our revised Target Price is S$1.65 (previously S$1.78).
It is worth mentioning that the historical PBR low was around 1.0x.
We upgrade our recommendation to NEUTRAL due to the recent price correction.

Chen Guangzhi Phillip Securities Research | https://www.stocksbnb.com/ 2018-10-29

SGX Stock Analyst Report NEUTRAL UPGRADE REDUCE 1.65 DOWN 1.780