Sembcorp Marine - DBS Research 2019-05-06: Show Me The Orders!

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

Sembcorp Marine - Show Me The Orders!

  • SEMBCORP MARINE LTD (SGX:S51)'s small profit of S$1.8m for 1Q19, largely in line.
  • YTD order wins have been lagging at S$175m; loweringFY19/20 forecasts by 26/36%.
  • Order wins remain key re-rating catalysts, which are expected to pick up.
  • Reiterate BUY; Target Price unchanged at S$2.40.



Maintain BUY; Target Price unchanged at S$2.40, based on 2.1x FY19F P/BV.

  • Sembcorp Marine’s share price has come under pressure of late in view of the lacklustre YTD wins. We find comfort that the company is seeing increasing enquiries and tendering activities, which bode well for order win momentum ahead.
  • The continued profitability in 1Q19 is also encouraging. In addition to the 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 SEMBCORP MARINE LTD (SGX:S51)’s contract wins. While order wins, a critical leading indicator for earnings recovery, have been lagging expectations YTD, 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 include,
    1. a Gravifloat 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.


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:

  • 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.


WHAT’S NEW - Sembcorp Marine's 1Q19 results in line; spotlight on order wins and gearing


Still in the black in 1Q19.

  • Sembcorp Marine reported headline net profit of S$1.8m in 1Q19. Excluding non-recurring items (accelerated depreciation, impairment and tax credit), net profit would have been ~S$10m, slightly lower than S$13m a quarter ago.
  • Revenue (ex rig sales impact) declined 13% q-o-q to S$608m (from S$702m). Operating margins are hovering around ~2%.
  • Interest income increased by ~S$3.7m to S$24.6m due largely to higher interest payments from Borr Drilling upon delivery of the last of the nine jackup rigs in January 2019. These are collected on a quarterly basis.

Expect contract win momentum to pick up.

  • In its outlook statement, management guided that offshore and marine sector continues to improve especially for the offshore production segment. Offshore drilling activities also saw increase in utilisation and day rates.
  • While YTD contract wins are lagging, management is seeing higher enquiry level and tendering, which would translate into higher contract wins, and thus benefit both the top line and bottom line.

Orderbook declined to S$5.77bn as at end-March

  • Orderbook declined to S$5.77bn as at end-March, from S$6.21bn a quarter ago, out of which c.54% or S$3.1bn is from drillship projects with Sete Brasil. The order book should largely be recognised in the next two years.
  • In January 2019, Sembcorp Marine delivered the last of nine jackup rigs to Borr Drillig and in February 2019, the harsh environment semisubmersible (formerly known as West Rigel) to Transocean.
  • Sembcorp Marine secured S$175m in 1Q19, including newbuild of a 12,000cbm LNG bunker vessel and repair & modernisation works on 13 cruise ships.
  • 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 for 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 October 2018, 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. Rosebank project off UK. Equinor has reportedly initiated talks with Shipyards for a newbuild FPSO. On 14 February 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 the change means a further pushback in contract award (from the initial 3Q18) 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. Sembcorp Marine remains in constant dialogue with Equinor on the project.
    4. There continues to be some niche demand for semi-submersible rigs (typically S$400-500m each) in the mid-water space, from which Sembcorp Marine might benefit.
  • In addition, during results briefing, management shared that it has recently responded to the invitation for newbuild FPSO for Bay Du Nord development. According to an Upstream article on 25 April, Equinor has visited Asian yards including the Korean trio and Singapore Sembcorp Marine on the potential newbuild.

Net gearing inched up to 1.47x vs 1.44x a quarter ago.

  • Management is evaluating options available to reduce the high gearing but is in no hurry to make a decision as yet.
  • While Sembcorp Marine’s current gearing level is on the high side, it is still manageable.
  • The company expects to receive the remaining US$100m payment for the ex-West Rigel semisub early next year. Borr Drilling could also make a partial payment of the ~S$1.2bn outstanding earlier than the agreed payment term – of up to five years from delivery (which took place between November 2017 and January 2019) – given the step-up interest charges and expected improvement in cash flow.

Earnings revisions.

  • We lowered our order win expectation this year from S$3.5bn to S$2.5bn given the slow order flow YTD. We have also lowered our EBIT margin assumption by 0.2ppt/0.8ppt for FY19/20. Our earnings forecasts are thus reduced by 26%/36% for FY19/20.





Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2019-05-06
SGX Stock Analyst Report BUY MAINTAIN BUY 2.400 SAME 2.400



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