Sembcorp Marine - DBS Research 2019-07-31: Near-term Earnings Weakness


Sembcorp Marine - Near-term Earnings Weakness

  • SEMBCORP MARINE (SGX:S51)'s 2Q19 net loss of S$8.5m was below expectations.
  • Orderbook (ex-Sete rigs) has dwindled to S$2.1bn; cut earnings forecasts for FY19/20.
  • Order wins remain the critical factor; yard merger speculations have resurfaced.
  • Reiterate BUY; Target Price lowered to S$1.90.

Maintain BUY; Target Price lowered to S$1.90, based on 1.8x FY19F P/BV (vs 2.1x previously).

  • Sembcorp Marine’s share price has come under pressure of late in view of the lacklustre YTD wins and Brazil yard investigation news. The worse-than-expected guidance for widened losses in 2H19 has not helped either.
  • Nevertheless, management remains hopeful of order wins with increasing enquiries and tendering activities. 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 SMM’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 robust order pipeline would translate into > S$1bn or more in new orders in the coming quarters, 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; and
    3. production-related platforms.

WHAT’S NEW - 2Q19 in the red

2Q19 swung back into the red.

  • Sembcorp Marine reported a small loss of S$8.5m in 2Q19 despite revenue (ex-rig sale impact) rising 19% q-o-q to S$722m. Operating margins dipped from ~2% to 1%. Excluding non-recurring items (accelerated depreciation, impairment and tax credit), net loss would have been ~S$2m vs profits of S~$10m in 1Q19 and S$13m in 4Q18.
  • In 1H19, Sembcorp Marine reported a net loss of S$6.8m, significantly narrower than S$50.3m a year ago in the absence of a one-off ~S$30 loss from the disposal of West Rigel rig in 2Q18.

Expect losses to widen in 2H19.

  • Management expects sequentially higher losses in the second half with full-year losses projected to be similar in range to last year’s losses. This is because of lower activity level due to low contract wins in the prior quarters.

Hopeful for materialisation of contract win.

  • In its outlook statement, management shared that the offshore and marine sector continues to improve especially for the offshore production segment. Offshore drilling activities are also seeing gradual improvement. While YTD contract wins are lagging, Sembcorp Marine has been actively responding to an increasing pipeline of tenders and enquiries for production and gas-related projects and management remains hopeful on securing new orders in the foreseeable quarters.
  • Orderbook running low, declined to S$5.27bn as at end- June, from S$5.77bn a quarter ago. Out of this, c.59% or S$3.1bn is from drillship projects with Sete Brasil. The orderbook should largely be recognised in the next two years.
  • Sembcorp Marine secured S$175m worth of new orders in 1Q19, including newbuild of a 12,000cbm LNG bunker vessel and repair & modernisation works on 13 cruise ships. No new orders were clinched in 2Q19.
  • 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 had reached an agreement with Djibouti on plans for a cross-country pipeline in May 2018. This indicates positive progress of 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, 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. 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.

Net gearing declined marginally to 1.42 vs 1.47 a quarter ago.

  • While the current gearing level is on the high side, it is still manageable. Sembcorp Marine 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 – up to five years from delivery (which took place between November 2017 and January 2019) – given the step-up interests and expected improvement in cash flow.

Parent - Sembcorp Industries (SCI) provides SMM with a 5-year subordinated loan facility of S$2bn

  • Sembcorp Industries (SGX:U96) provides Sembcorp Marine with a 5-year subordinated loan facility of S$2bn to strengthen its financial position amid the current downturn in the global offshore and marine (O&M) industry. To fund the loan, Sembcorp Industries will issue S$1.5bn of bonds (5-year maturity @ 3.55% coupon) to DBS Bank as the sole lead manager and initial purchaser through a private placement to investors which include Temasek. The remaining S$500m will be funded through Sembcorp Industries’s existing available resources and facilities.
  • Sembcorp Marine has drawn down the S$1.5bn subordinated loan to retire approximately S$1.5bn of borrowings, while the balance of S$500m will be utilised for working capital of new contracts. Assuming the S$2bn was fully drawn as at end- June 2019 resulting in a net increase of S$500m in debt, Sembcorp Marine’s net gearing would rise from 1.42x to 1.64x. Based on a ballpark estimate, the higher interest expense from the net loan increase should be marginal, offset by interest savings from the lower cost loan (estimated to be ~S$18m).

Singapore yard merger speculation.

  • Lloyd’s List published an article titled “Singapore’s yard merger faces a bumpy road” on 15 July. This could have revived speculations on the merger between Sembcorp Marine and Keppel O&M. Please click for our thematic report on yard merger: Shipbuilding - Merger On The Cards ?

Earnings revisions.

  • We lowered our order win expectation this year from S$2.5bn to S$1.5bn given the slow order flow YTD. We have also lowered our EBIT margin assumption by 3.9ppts/1.59ppts for FY19/20. Our earnings forecasts are thus cut from +S$39m/+S$72m to -S$54m/+S$27m for FY19/20.
  • Earnings growth in 2020 is predominantly lifted by the absence of a S$48m accrelerated depreciation.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2019-07-31
SGX Stock Analyst Report BUY MAINTAIN BUY 1.90 DOWN 2.400