Sembcorp Marine - CGS-CIMB Research 2019-05-03: Positive Operating Leverage


Sembcorp Marine - Positive Operating Leverage

  • We are relieved that Sembcorp Marine made a profit of S$1.7m in 1Q19, with EBIT margin close to 1%, vs. operating loss in FY18.
  • YTD orders at S$175m vs. our S$2bn forecast. Management is still hopeful of orders given the strong enquiries for its production units. 2H19F could see some improvement in EBIT margin and provision write-back with delivery of projects.
  • Maintain ADD and Target Price of S$2.21.

Profitable, margin improved sequentially

  • SEMBCORP MARINE LTD (SGX:S51)'s 1Q19 net profit of S$1.7m was in line with our expected S$2m. The net profit was partially lifted by an S$1.8m tax credit, without which it would have been a slight loss of S$0.1m. 1Q19 formed 6% of our FY19 forecast of S$34m as we expect a stronger 2H19F.
  • EBIT margin came in at close to 1%, up from 0.2% in 4Q18. Excluding non-recurring items, EBIT margin would have been 1.5%. In the EBIT items were also S$12m accelerated depreciation and project write-downs.

Net gearing crept up to 1.47x , still evaluating securitisation

  • Sembcorp Marine's balance sheet remained unimpressive as net gearing crept up to 1.47x vs. 1.44x in 4Q18. Collection from customers were good (S$2687m) but was offset by capex incurred (S$77m) which included the shift from Tanjung Kling yard to the new Tuas Boulevard Yard.
  • Management is still evaluating the option for Borr Drilling receivables securitisation. With the completion of Hereema offshore crane vessels (contracted in 2015 for US$1bn) in 2Q19/3Q19, cost pressure and balance sheet could be alleviated slightly.

Ship repair and floaters y-o-y growth

  • Overall revenue declined 31% y-o-y and 11% q-o-q in 1Q19 to S$811m as more deliveries took place in its rig building segment.
  • Sembcorp Marine delivered the last (9th) Borr Drilling jack-up rig in 1Q19. This resulted in a 51% y-o-y drop in rig-building revenue. However, ship repair revenue rose 30% y-o-y on the back of higher ship repair value per vessel of S$1.37m vs. S$0.99m in 1Q18.
  • Floaters revenue rose 35% y-o-y to S$284m from the execution of Petrobras P58/P71 floating production storage and offloading (FPSO) units, Statoil FPSO, Shell Vito FPSO, and Karish FPSO.

S$175m order win YTD; we project FY19F order book of S$2.6bn

  • Management is still hopeful on orders for subsidiary Gravifloat. Sembcorp Marine's S$175m YTD orders included the design and construction of a 12k cbm LNG bunker vessel and repair works for 13 cruise ships. Management is hopeful for more orders in the coming quarters.
  • We keep our S$2bn FY19 order forecast (FY18 order win: S$1.2bn). While Rosebank FPSO is still pending Equinor’s re-evaluation, Sembcorp Marine is bidding for Bay Du Nord FPSO, due for final investment decision (FID) in 2020.

Maintain S$2.21 Target Price, based on 2x P/BV, close to 5-year average

  • The stock is trading at 1.5x FY19 P/BV or -0.5 s.d. of its 5-year average.
  • Order wins and rices are key catalysts.
  • Fund raising is key risk to our call.

LIM Siew Khee CGS-CIMB Research | 2019-05-03
SGX Stock Analyst Report ADD MAINTAIN ADD 2.210 SAME 2.210