Sembcorp Marine - UOB Kay Hian 2018-10-26: 3Q18 Losses Expected To Continue

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

Sembcorp Marine - 3Q18: Losses Expected To Continue

  • Sembcorp Marine reported 3Q18 core net loss of S$30m. Core net loss was S$51m for 9M18, or 67% and 110% of our and consensus estimates respectively, largely within expectations.
  • Headline operating losses appear to be contracting, but we note that core operating margin for the offshore engineering segment was comparable q-o-q. Net gearing continues to rise and could be an impediment to securing contracts.
  • Maintain HOLD and target price of S$1.83. Entry price: S$1.65.



3Q18 RESULTS


Core net loss of S$30m, within expectations.

  • Sembcorp Marine (SMM) reported headline net loss of S$29.8m in 3Q18. Excluding S$7m forex gains and a S$7m loss from sale of West Rigel, core net loss was about S$30m.
  • For 9M18, core net loss was S$51m, representing 67% and 110% of our and consensus estimates respectively, largely within expectations.

Excluding 2x Borr rig deliveries, revenue was up 27% yoy.

  • Revenue for 3Q18 was S$1.2b, which included revenue impact from the delivery of two Borr drilling units. Excluding this and revenue adjustment in 3Q17, core revenue for 3Q18 was higher q-o-q) at S$773m, attributed to revenue recognition from new projects and higher work volumes.

Repair revenue improved on higher value per vessel.

  • Repair revenue in 3Q18 was S$131m (+6% y-o-y, +4% q-o-q), up on higher work value per vessel. Repair volumes continued to decline to 72 vessels for 3Q18. However, this was mitigated by a jump in the value per vessel to S$1.8m (+32% y-o-y, +13% q-o-q).

Offshore engineering operating margins remained weak despite group level improvement.

  • Operating losses appear to be narrowing. Adjusted group core EBIT margin improved from -5.1% in 2Q18 to -1.9% in 3Q18. However, the improvement appears to be driven by a spike in operating profit from the “Others” segment, which came in at S$21m (typically ~S$1m in prior quarters).
  • Solely analysing the key offshore engineering segment (called rigs & floaters, repairs & upgrades, offshore platforms and specialised shipbuilding), adjusted operating margin was estimated at -5% (2Q18: -5.3%), and showed little improvement despite early-stage revenue contributions from new projects (Vito, Karish).

Interest income rose 38% qoq on interest income from Borr.

  • Interest income rose 38% q-o-q to S$14.9m in 3Q18. It is expected to rise further with each rig delivery that Sembcorp Marine makes to Borr.
  • Sembcorp Marine has delivered eight out of nine rigs in total, with one more to be delivered in 1Q19.

Net gearing grew to 140%.

  • Net gearing for 3Q18 was 140% (2Q18: 126%, 4Q17: 113%). Despite the higher gearing, net interest expense fell to S$12m on higher interest income received from Borr. Net gearing is expected to improve in 2019 upon partial receipt of cash proceeds from the delivery of the West Rigel, whose delivery date has been brought forward.

No contract win in 3Q18.

  • There was no contract win or variation order received in 3Q18. 9M18 contract wins stood unchanged at S$730m. Including the recent US$166m contract win from Varg in Oct-18, ytd contract win stands at about S$1b.



STOCK IMPACT


Losses like 2019.

  • Headline losses appear to be opening address cited losses to continue for the coming “quarter”. Management could be seen by 1Q19.
  • By our estimates, assuming a revenue run before a profit can be seen assumes that to fall.
  • Judging by the offshore is probable that the current remains overheads we are into 1Q19 at least.

High net gearing a contracts.

  • The outlook for contracting is 2019. However, Sembcorp Marine’s high net could be a contracts. Potential clients do take sheet when selecting yards.


EARNINGS REVISION

  • No change to our earnings estimates.


VALUATION/RECOMMENDATION


Maintain HOLD and target price of S$1.83.

  • Our target price remains at S$1.83, pegged to 1.7x 2019F P/B (-0.5SD of long-term mean). Our valuation multiple is justified by the continued poor profitability. Until more signs of an earnings recovery emerges, we keep our HOLD call.
  • Upside risk remains potential M&A action.
  • Entry price is S$1.65.





Foo Zhiwei UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-10-26
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.83 SAME 1.83



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