Sembcorp Marine - OCBC Investment 2019-02-21: A Balancing Act

SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - A Balancing Act

SEMBCORP MARINE LTD (SGX:S51) reported a 0.2% y-o-y rise in revenue to S$913.2m and net profit of S$5.9m in 4Q18, bringing full year net loss to S$74.1m vs. our forecast of S$85.6m net loss and the street’s expectation of a S$97m net loss.
In FY18, Sembcorp Marine secured new orders of S$1.18b, compared to S$750m in FY17. This brought the net order book to S$6.21b; excluding Sete Brasil drillships, the net order book stood at S$3.09b.

It is encouraging to see Sembcorp Marine swing into the black after being in the red in the previous quarters, but what would catalyse the Sembcorp Marine's share price is still new order flow that is sustainable going forward. With regards to this, Sembcorp Marine mentioned that it is responding to increasing enquiries and tenders for innovative engineering solutions relating to offshore production units, but offshore rig orders will take some time to recover as the market remains oversupplied.
Management also reminded that the lead time for new orders, depending on the size and scope of work involved, may take six months to slightly more than a year, as solutions are more customized (rather than standardized) and a certain level of co-development with the client may be involved.

Sembcorp Marine’s net gearing was 1.44x as at end FY18, compared to 1.37x as at 9M18 and 1.13x as at end FY17. Current debt was S$1.1b as at FY18, and the group expects moderately lower capex for FY19 compared to S$343m in FY18.
Considering that future new orders may have increased working capital needs, and the group’s current balance sheet position, Sembcorp Marine has to be selective when securing new orders (e.g. not too unfavourable payment terms).
We fine-tune our estimates and our fair value estimate rises from S$1.73 to S$1.77.

Low Pei Han CFA OCBC Investment Research | https://www.iocbc.com/ 2019-02-21

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.77 UP 1.730