SEMBCORP MARINE LTD (SGX:S51)
Sembcorp Marine - Secures New Contracts But Not At A Turning Point Yet
- While the S$400m worth of new contracts announced on 2 Sep 19 is positive in the medium term, we believe this does not presage a turning point in new-order flows for the industry.
- In the short term, Sembcorp Marine’s earnings will be impacted by poor order flows. We downgrade our earnings estimates and lower our target price to S$1.22.
- Maintain HOLD. Entry price: S$1.10.
WHAT’S NEW
New contracts announced.
- SEMBCORP MARINE (SGX:S51) announced S$400m of new contracts in various industries. These include:
- an FPSO conversion project for Shapoorji Pallonji and Bumi Armada;
- three gas-related FSRU and FSU conversion projects for Mitsui/Karpower, Gasfin Development and BW LNG;
- a makeover of Japan's largest cruise ship for NYK Cruises; and
- fabrication of 15 jackets for an offshore Taiwan wind farm.
- While Sembcorp Marine did not provide a breakdown for the $400m worth of contracts, we estimate that at least 80% of this relates to the FPSO, FSRU and FSU conversion projects.
- Year-to-date new orders total S$575m vs our full-year estimate of S$1.0b. We forecast S$1.2b in new orders for 2020.
STOCK IMPACT
Positive in the medium term but 2H19 will be difficult, in our view.
- It is positive that the company has added to its orderbook in the medium term and importantly, Sembcorp Marine appears to be able to clinch projects in quite a varied number of sectors - cruise lines and wind power, apart from its bread-and-butter oil & gas projects. However, 2H19 will be a difficult period, impacted by poor new-order flow from 2H18 to 1H19.
- Sembcorp Marine commented that today’s project-win announcement will not have a material impact on 2019 earnings. See Sembcorp Marine's announcements.
Globally, the rig market has improved.
- Globally, the rig market has improved, with both semi-submersible and jack-up rigs seeing slight y-o-y increases in utilisation rates. However, we note there are only nine semi-sub newbuilds in the pipeline (7% of total global semi-sub fleet) vs jack-ups which have 61 newbuilds (12% of global fleet).
- In addition, Westwood Global Energy has estimated there are around 32 rigs in the Asia-Pacific region that are warm stacked, potentially adding to a market that is already oversupplied.
EARNINGS REVISION/RISK
- We increase our net loss estimate for 2019 to S$47m (from -S$18m) and slash our net profit estimates for 2020-21 by 46% and 71% respectively. The company has stated that losses for 2019 are “projected to be similar in range to last year’s losses”.
VALUATION/RECOMMENDATION
Maintain HOLD but lower our DCF-based target price by 7.5% to S$1.22.
- At our fair value, the company would trade at 1.1x 2020F P/B. While the company’s one-year forward P/B valuation is already 1SD below its 10-year average of 2.7x and near its historical low of 1.0x, we believe the ongoing Brazilian-corruption investigation will continue to remain an overhang on its share price.
- Entry price is S$1.10.
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. A settlement of the corruption enquiry material overhang on the stock.
Singapore Research Team
UOB Kay Hian Research
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https://research.uobkayhian.com/
2019-09-03
SGX Stock
Analyst Report
1.22
DOWN
1.320
