Sembcorp Marine - DBS Research 2019-02-21: Turning The Corner

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

Sembcorp Marine - Turning The Corner

  • Sembcorp Marine’s 4Q18 earnings swung back into the black, beating market expectations. 
  • Higher activity level should translate to better operating profits in FY19. 
  • Uptick in order flow is a key re-rating catalyst; potential M&A. 
  • Good entry point; reiterate BUY; Target Price unchanged at S$2.40. 



Good entry point; reiterate BUY

  • Maintain BUY; Target Price unchanged at S$2.40, based on 2.1x FY19F P/BV (0.75SD below mean).
  • Despite the rebound in oil prices and higher capital expenditure (capex) guidance by oil majors, Sembcorp Marine’s share price has yet to reflect the brighter outlook ahead.
  • Sembcorp Marine (SGX:S51) is turning the corner with operational improvements and more upbeat order win prospects. The margin expansion seen in 4Q18 results serves as a harbinger of improved prospects ahead and confidence booster.
  • In addition to contract win catalyst, we believe any re-emergence of yard consolidation speculation could also buoy Sembcorp Marine’s share price.


Where We Differ: More bullish on SMM’s contract wins.

  • While order wins, a critical leading indicator for earnings recovery, has been lagging behind expectations in 2018 with only S$1.2bn new wins in the bag, partly due to the delay in project final investment decisions (FIDs), we remain optimistic that offshore capex is set to recover.
  • We believe Sembcorp Marine’s strong order pipeline would translate into S$3bn or more in new orders in 2019, which may potentially include,
    1. a Gravifloat (Sembcorp Marine’s proprietary technology) modularised liquefied natural gas (LNG) exporting terminal for Poly-GCL at c.S$1bn;
    2. two large Compressed Gas Liquid carriers for SeaOne Caribbean valued at S$800m in total,
    3. Rosebank’s floating production storage and offloading (FPSO) contract that could be worth up to US$2bn.

Sale of Sete Brasil rig orders.

  • Sete Brasil has launched a tender for the sale of the four ultra-deepwater drilling units from Singapore rigbuilders (two each) with bids expected on 28 Feb. The conclusion of sale will remove an overhang on Singapore rigbuilders.


Valuation:

  • Our target price of S$2.40 is based on 2.1x FY19 P/BV, pegged to 0.75SD below its mean valuation since 2004. Sembcorp Marine’s book value has already been written down after the massive S$609m provisions taken in FY15.


Key Risks to Our View:

  • Key downside risks are sustained low oil prices which would affect rig count and new building activities, execution risks in new product types, and corruption allegations in Brazil that, if the company is found guilty, could lead to financial and reputational loss.
  • Upside risk could come from privatisation or merger & acquisition (M&A) activities, as well as the write-back of provisions from successful deliveries or vessel sales.


WHAT’S NEW - 4Q18 results beat expectations


4Q18 earnings swung back into the black.

  • Sembcorp Marine surprised the market with S$5.9m headline profit in 4Q18, vs expectation of a loss of S$20-30m. Excluding non-recurring items (accelerated depreciation, impairment and tax credit), net profit would have been higher at ~S$12.6m.
  • Despite 10% q-o-q decline in revenue (excluding revenue from Borr Drilling) to ~S$710m, gross margin improved to 2.2% in 4Q18, from -1.1% a quarter ago.
  • Interest income was also higher by S$6m to S$20m due largely to higher interest payments from Borr Drilling upon delivery of rigs, which is collected on a quarterly basis.
  • FY18 net losses amounted to S$74m, from core profit of S$213m in FY17. Hence no final dividend was declared for the year. We are leaving our FY19-20F earnings largely intact as we have already expected SMM to turn profitable this year.

More upbeat on contract win momentum.

  • In its outlook statement, management guided that offshore and marine sector continues to improve with more offshore production projects reaching their final investment decision (FID) stage and this trend is expected to continue.
  • While the improvement in offshore capex budgets will take time to translate to new orders, management is hopeful that the higher enquiry level and tendering would translate to higher contract wins, and thus benefit both the topline and bottomline.

Orderbook declined to S$6.21bn as at end Dec, from S$6.39bn a quarter ago.

  • Orderbook declined to S$6.21bn as at end Dec, from S$6.39bn a quarter ago. Of which c.50% or S$3.1bn is from drillship projects with Sete Brasil. The order book should largely be recognised in the next two years.
  • Sembcorp Marine secured S$1.2bn of new orders in 2018, including two projects for renewable energy engineering solutions worth over S$200m secured in 4Q18. Other key contracts secured in 2018 include:
    1. Sembcorp Marine’s second newbuild FPSO (Hull and living quarter and topside modules; ~S$480m) for Energean’s Karish and Tanin deepwater field;
    2. semi-submersible production unit (~S$250m) for Shell’s Vito field;
    3. FPSO modification works (~S$230m) for Teekay (announced in Oct- 2018; subject to fulfilment of conditions)
  • The major contracts in the pipeline that we are expecting in 2019 include the following:
    1. The potential first customer for Sembcorp Marine’s Gravifloat LNG exporting Terminal - Poly-GCL has reached an agreement with Djibouti on plans for a cross-country pipeline in May-2018. This indicates positive progress of the gas development project and is a step closer to finalisation of the Gravifloat contract that is expected to be worth c.S$1bn;
    2. Seaone’s preliminary study for compressed gas liquid (CGL) carrier has been completed. According to an Upstream article on 18-Oct, Seaone has introduced and is marketing its CGL technology as a cost-efficient solution to mainstream LNG refrigeration. Once Seaone decides to proceed with the FID, Sembcorp Marine could secure a contract for two such carriers worth a total of S$800m;
    3. Chevron’s divestment of its stake in Rosebank project off UK to Equinor has delayed the award of a newbuild FPSO contract that was supposed to be announced at end 3Q18. Sembcorp Marine and DSME were the two finalists for the job prior to Chevron’s divestment. On 14 Feb 2019, Equinor announced that it will ditch Chevron’s development plan and pursue a leaner design for the FPSO based on its Johan Castberg FPSO for offshore Norway. While this means a further pushback in contract award with a lower contract value (expected to be up to US$2bn previously), we believe Sembcorp Marine stands a fair chance with its existing working relationship with Equinor on the Johan Castberg FPSO project and strength in developing compact and innovative solutions.
    4. There continues to be some niche demand for semi-submersible rigs (typically S$400-500m each) in the mid-water space, which Sembcorp Marine might benefit.

Sale of Sete Brasil rig orders.

  • Sete Brasil has launched a tender for the sale of the four ultra-deepwater drilling units from Singapore rigbuilders (two each) with bids expected on 28 Feb. The conclusion of sale will remove an overhang on Singapore rigbuilders.

Net gearing inched up further to 1.44x from 1.37x a quarter ago.

  • Including the last rig to be delivered by 1Q19, Sembcorp Marine would have outstanding receivables of ~S$1.1bn from Borr Drilling, which is likely to be collected within 3 years (with interest rate step-ups) once rig charters are secured, allowing Borr to refinance the rig cost at lower rates. Collection from Borr will lower Sembcorp Marine’s current net debt of S$3bn by 33% to S$2.2bn, bringing net gearing down to ~1x.


Deleveraging exercise?

  • Management is exploring options to address the rising gearing issue. While the possibility of equity raising can’t be ruled out, we believe Sembcorp Marine has other more cost-efficient alternatives such as securitisation of the receivables from Borr Drilling, and conversion of loan to PERPs.





Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2019-02-21
SGX Stock Analyst Report BUY MAINTAIN BUY 2.400 SAME 2.400



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