Sembcorp Marine 2Q19 - UOB Kay Hian 2019-07-31: No Silver Lining Yet Within The Gloomy Clouds

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

Sembcorp Marine 2Q19: No Silver Lining Yet Within The Gloomy Clouds

  • SEMBCORP MARINE (SGX:S51)’s 2Q19 revenue of S$731m (-55% y-o-y) and net loss of S$8.5m were below our and market expectations. While 2Q19 gross profit margin recovered y-o-y to 0.6% (2Q18: - 2.9%), this was sequentially worse than the 2.7% in 1Q19.
  • Given that Sembcorp Marine only managed S$175m in new orders to date, management was decidedly downbeat at the analyst briefing, guiding for continued weakness in 2H19 and possibly into 1Q20.
  • Maintain HOLD. Target price: S$1.32. Entry price: S$1.25.



1H19 RESULTS


Tough conditions persist.

  • With continued low overall business volumes, Sembcorp Marine reported a weak 2Q result with net loss of S$8.5m negatively impacted by accelerated depreciation of its old Tanjong Kling yard (TKY) and lower revenue from rig & floater construction (-61% y-o-y), and offshore platform projects (-60% y-o-y). The repairs & upgrades business saw a 13% y-o-y increase in revenue, but this was not enough to offset the poorer performance from the above business units.
  • Weak financial outlook in 2H19 is mainly the result of:
    1. the poor order flow in 1H19 means that Sembcorp Marine will not be able to recognise first-stage revenues in new projects in 2H19, and also
    2. accelerated depreciation costs from the closure of TKY.
  • Note that the medium-term outlook appears brighter as 2020 earnings will not be impacted by the accelerated depreciation issue, while cost savings in excess of S$40m is expected to be realised by operations at the new Tuas yard.


A subdued analyst briefing.

  • Given the near-term new orders in 2H19, it pointed to business volumes being “significantly below peak levels”. Its poor ownership of various projects.


STOCK IMPACT


Outlook for new orders.

  • Sembcorp Marine remains vessels has increased post the successful completion of the LNG-powered Sleipnir semi-submersible crane, the largest floating crane globally.
  • LNG-related vessels such as LNG bunkering or dual-fuel vessels have also seen an increase in enquiries.

Balance over.

  • In our view, Sembcorp Marine’s balance Sembcorp Industries (SGX:U96), has shown via the S$2b subordinated loan. The company will weak industry environment and we believe it has been doing so as it has been ‘rightsizing’ its operations.

No dividend was declared.



EARNINGS REVISION/RISK


Forecasting a full-year loss for 2019.

  • We have lowered our earnings forecast for 2019 to a loss of S$18m (NPAT of S$48m previously).
  • We have also meaningfully lowered our 2020E NPAT forecast by 44% to S$28m.

Orderbook forecast.

  • We forecast that Sembcorp Marine will receive S$0.8b and S$1.2b in new orders for 2019 and 2020 respectively.


VALUATION/RECOMMENDATION


Maintain HOLD.

  • We resume coverage on Sembcorp Marine with a HOLD rating and an updated DCF-based fair-value price of S$1.32.
  • At our fair value, the company would believe that the ongoing Brazilian-corruption investigation will remain an overhang on the stock.
  • Entry price is S$1.25.

Risks.

  • Downside risks include lower-than-expected orderbook wins for its O&M segment, and lower long-term oil and gas prices which would negatively impact exploration & production spending. Meanwhile, upside risks include a smaller-than-expected settlement of the corruption investigation and increased oil-industry spending.

Negative earnings revision momentum.

  • We note that going that Sembcorp Marine’s earnings-revision momentum may continue to be negative in the next week or so as forecasts are adjusted down.


SHARE PRICE CATALYST

  • Further strength in new order wins for the O&M segment, particularly for production and LNG-powered and LNG-related assets.
  • Resolution of its Brazilian corruption enquiry. In our view, a settlement of the corruption enquiry, either via a fine or similar, would remove a material overhang on the stock.





Singapore Research Team UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-07-31
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.32 DOWN 1.830



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