Sembcorp Marine - OCBC Investment 2019-05-06: Hoping For New Orders In 2H19


Sembcorp Marine - Hoping For New Orders In 2H19

  • Net order book declining.
  • Net gearing 1.47x.
  • A balancing act.

Soft 1Q19 results

  • SEMBCORP MARINE LTD (SGX:S51) reported a 31.3% y-o-y fall in revenue to S$810.6m and net profit of S$1.7m for 1Q19, such that the latter accounted for 13% and 18% of ours and the street’s earlier full year estimates, respectively.
  • Excluding non-recurring items (i.e. accelerated depreciation relating to Tanjong Kling yard), net operating profit for 1Q19 was S$12m, compared with net operating profit of S$23m for 4Q18.

Net order book (excl. Sete) about half of FY18 rev

  • New contracts secured in 1Q19 amounted to S$175m, while net order book as at 1Q19 stood at S$2.6b (excluding Sete drillship contracts). This represents just about half of total revenue in FY18.
  • Despite the slow 1Q, management continues to believe that new orders should flow through this year, though time will be required given the level of customization required for certain large projects. To recap, Sembcorp Marine won new orders of S$1.18b in FY18 and S$750m in FY17.

Net gearing higher at 1.47x

  • Net gearing rose to 1.47x in 1Q19 from 1.44x in FY18, partly due to the installation of new capabilities in the group’s yard.
  • Sembcorp Marine has to be selective when securing new orders (e.g. those with not too unfavourable payment terms), considering the group’s current balance sheet position and that future new orders may have increased working capital needs. Hence it is not surprising for the group to look for ways to improve its balance sheet, e.g. potentially securitising receivables from Borr Drilling.

Industry improving but risks remain

  • Management commented that competition remains intense, and production activity for the group is expected to remain low. Still, global capex spend for offshore exploration and production continues to improve especially for the production segment, while offshore drilling saw improvement in day rates and utilization levels for some areas.
  • Risks include
    1. higher than expected capex requirements and potentially a need to raise funds,
    2. risks relating to Brazil, and
    3. lower than expected new order flows.
  • We maintain our fair value estimate of S$1.77 on Sembcorp Marine. Maintain HOLD. 

Low Pei Han CFA OCBC Investment Research | https://www.iocbc.com/ 2019-05-06
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.770 SAME 1.770