Sembcorp Marine - CGS-CIMB Research 2019-07-02: Net Gearing Improves As Sleipnir Sails

SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - Net Gearing Improves As Sleipnir Sails

We visited SEMBCORP MARINE LTD (SGX:S51)’s yard to see the world’s largest and strongest heavy lift crane, Sleipnir for Heerema. The unit was fully completed in 2Q19.
The payment term is milestone and we estimate c.S$300m of collection in 2Q19 with more payments in 2H19. Net gearing improves to 1.3x in 2Q19.
On the back of slower YTD order wins of c.S$200m, we taper our 2019 win expectations to S$1bn (from S$2bn). Our new Target Price is S$1.75.

We attended the yard tour to see the completed semi-submersible crane vessel, Sleipnir built for Heerema. The vessel has a 202-metre by 102-metre reinforced deck area, making it the largest crane vessel to be built. It is equipped with two 10,000-tonne revolving cranes that can lift loads of up to 20,000 tonnes in tandem. The contract was awarded in July 2015 at about US$950m.
Sleipnir is backed by various chartering contracts – Leviathan topsides installation in the Mediterranean Sea; Tyra jackets and topsides installation and removal in the Danish North Sea; and Brae B jackets and topsides removal in the UK North Sea to name a few.

As at 1Q19, it was 98% completed. The vessel was christened in May and will be recognised as completed in 2Q19. We believe S$300m has been collected in 2Q19 with more payments to be collected upon delivery (end of first week of July), end-FY19 and very little in FY20. We understand that there was also collection of c.US$100m from Transocean Norge during the quarter.
Assuming no major significant increase in 2Q19 capex (1Q19: S$76.5m), we expect net gearing to fall to c.1.3x (1Q19:1.47x).
We believe with the completion of this sizeable job, the number of staff strength could be moderated. Note that at its peak, the construction of Sleipnir involved up to 3,700 workers in a single shift. Sembcorp Marine had a workforce of 11,847 as at end-Dec 18.

Sembcorp Marine had total borrowings of 9885-year S$2bn subordinated loan (S$1.5bn bond issued to DBS/Temasek and S$50 from Sembcorp Industries) is the best outcome achieved after years of speculation options for Sembcorp Marine’s highly sheet. This move risks of dilution shareholding structure.
If Sembcorp Marine retires c.S$1 aesthetically be reduced to 0.7x (including Sleipnir’s collection) also positions Sembcorp Marine to bid for payment terms is key catalyst.

Equinor expects to extract more value from the project and look for opportunity to reduce redevelopment costs. This means the potential contract size for Sembcorp Marine could be smaller than the previous bid submitted to Chevron at around US$1.4bn-5bn.

Sembcorp Marine said during 1Q19 earnings briefing that it was invited to participate in the Equinor FPSO, Bay Du Nord for development off Newfoundland, Canada. Pre-development and development-phase expenditures for the project are estimated by Upstream at c.S$6.8bn (US$5bn).

the market has been waiting for the US$1bn project for Poly-GCL for more than 2 years. We think the order award could continue to be pushed back until Sembcorp Marine’s balance sheet shows improvement (i.e. retiring of $1.5bn loan). We think it is more realistic to expect an award in 2020.
We understand from management that the finalisation of the project is dependent on ironing out fine prints on project financing by the customer and bank.

We expect Sembcorp Marine to deliver a slight profit of S$1m-2m with the help of some provision write-backs. It achieved a reported profit of S$1.7m in 1Q19 with a tax credit of S$1.8m. Ship repair and floaters (mainly FPSO) should continue to be the key revenue drivers.

Funding risk is low post the recent support from Sembcorp Industries (SGX:U96) and Temasek. The key catalyst is contract momentum which can be lumpy.
With YTD order wins at c.S$200m, we taper our order win expectations for 2019 and 2020 to S$1bn and S$1.5bn (previously S$2bn-2.5bn) respectively. Operating leverage may not be optimal given the slower-than-expected momentum in the near term.
We lower blended EBIT margin for FY19 from 3.2% to 2.5% (1Q19: 0.9%). Our EPS is cut by Order book stood at S$2.65bn at end-1Q19.
We now value Sembcorp Marine based on 1.6x CY19F P/BV (20% discount to average of 2.1x) vs. 2x P/BV previously.
Cost overruns and order book depletion are key risks.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-07-02

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