Sembcorp Marine - CGS-CIMB Research 2019-09-02: Positive Newsflows Cap Downside

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SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - Positive Newsflows Cap Downside

• Finally some positive news on the contract win front -- wins worth S$400m. YTD contract stands at S$575m vs. our 2019 expectation of S$500m.
• With this, we estimate its orderbook reached about S$2.5bn. The news could provide some lift to Sembcorp Marine's share price.
• Upgrade to HOLD with a revised Target Price of S$1.26, based on 1.2x CY19F P/BV (-1 s.d. of 5-year mean). Consistent contract wins are re-rating catalysts.

Low risk S$400m contracts

• SMM today announced it won six contracts worth a total S$400m. See Sembcorp Marine's announcements. We see little risk for the S$400m of contracts announced as FPSO/ FSRU/FSU conversions are not new to SEMBCORP MARINE (SGX:S51). We think the largest contract within today's announcement is the FPSO conversion project with Shapoorji Pallonji and Bumi Armada. This is to convert Ariake, a very large crude carrier (VLCC), into a floating production, storage and offloading (FPSO) unit for the JV companies of Shapoorji Pallonji Oil and Gas and Bumi Armada. The vessel will produce up to 90k barrels of oil per day with a 1.3m barrel storage facility. The project includes hull repairs and upgrading as well as fabrication of at least three topside modules which Sembcorp Marine will install on the vessel. Delivery is scheduled for 2H2021.
• Other contracts included are:-
  • Three new gas projects for delivery from now till Feb 2020.
    • These comprise:-
      1. conversion of LNG tanker Dwiputra to floating storage and regasification unit (FSRU) for a JV between Mitsui OSK and Karpower International,
      2. conversion of NYUI Line’s former gas carrier LNG Flora into a 127kcbm floating storage unit (FSU) for Gasfin Development,
      3. upgrading works on the 173.4kcbm FSRU BW Magna for BW LNG.
  • Repairs & upgrades for Asuka II - Japan's largest cruise ship.
    • This will take over 45 days from Jan 2020. The project includes installing a sulphur oxide scrubber unit on the vessel, to comply with the new International Maritime Organisation (IMO) requirement.
  • Jacket foundations fabrication for Formosa 2 Offshore Wind Farm.
    • This is Sembcorp Marine’s first exploit in the Taiwanese offshore wind sector, scheduled for delivery by Dec 2020. This is a contract with Jan De Nul to fabricate 15 jacket foundations for a 376MW facility (Taiwan’s largest offshore wind farm), generating electricity for > 380k households in late-2021.

FEED with Cambo

• Last week, Sembcorp Marine announced that it has won an exclusive front-end engineering and design (FEED) contract to design a Sevan cylindrical FPSO for Siccar Point Energy's Cambo field development on the UK Continental Shelf.
• We believe what while the FID (final investment decision) could only be achieved in 2020, the exclusivity buys hope that some work would be given to Sembcorp Marine when the project goes live in design/ build phase.
• Sevan is a subsidiary of Sembcorp Marine, famous for its cylindrical shape design. In 2011, it awarded China's Cosco to build a US$525m cylindrical rig but the latter incurred hefty cost overrun during the construction phase.
• Depending on the scope of design, we think Sembcorp Marine stands a good chance to be awarded a contract in the range of US$500-1bn if it is for a newbuild FPSO.

Gravifloat could be shared

• Early-Aug, Beijing-based China Communications Construction Company (CCCC) has invested in a majority stake in the integrated Calub and Hilala gas project in Ethiopia that will require construction of both onshore and offshore facilities via a terminal in Djibouti. This could breathe new life into the US$4bn project after many years of delay due to the financial constraints of Poly-GCL.
• According to Upstream, Poly-GCL has an initial agreement with Sembcorp Marine to build a liquefaction train on a fixed steel structure. Although there has been no change in scope for Sembcorp Marine, the investment by CCCC may also mean some of the modules' engineering, procurement and construction (EPC) work could be awarded to CCCC's subsidiary Shanghai Zhenhua Heavy Industry.

Pipeline is strong for 2020 /2021

• According to news reports, Sembcorp Marine is 2020 (contract award in 2021) including :-
  • Browse project. This includes two FPSO for the Browse LNG project in Australia. Other contenders include the three Korean yards, COEC, Cosco Shipping, CIMC Raffles and Sapura Energy. The project is slated to be up for tender by end-2019 or early-2020.
  • Crux project-offshore platform for Shell in Western Australia. For the topsides, Shell has previously said it intends to choose a winner in 1Q20. Shell is aiming to award the package for the 190metre-tall jacket and piles in Jan 2020 to ensure the completion of the jacket installation. Other contenders include China’s Offshore Oil Engineering Company (COEC), McDermott, Saipem, Larsen and Toubro and Sapura Energy.
  • Whale project - topsides and living quarters contract similar to Vito for Chevron for the Whale oilfield in the Gulf of Mexico.

Upgrade from Reduce to Hold with Target Price of S$1.26

• Our previous Target Price of S$1 was benchmarked to 2016 when Sembcorp Marine’s orders S$0.32m.
• Sembcorp Marine's share price traded oversupply of rigs. We now peg our Target Price to -1 s.d of 5- year mean, or 1.2x P/BV.
• We think the stock could bounce up and trade within a 5-10% range in the next three months. Sustainable order momentum and quarterly improvement of EBIT trend are potential key re-rating catalysts.

Risks

• We believe the recent resurgence and to some extent dampen Sembcorp Marine’s reputation as it guns for orders, given the strict environmental, social and governance (ESG) of oil majors.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-09-02

SGX Stock Analyst Report HOLD UPGRADE REDUCE 1.26 UP 1.160