Sembcorp Marine - OCBC Investment 2019-10-08: Outlook Remains Dim


Sembcorp Marine - Outlook Remains Dim

  • Slower than expected new order flow.
  • Settlement with Sete Brasil regarding drillships.
  • But risks still remain.

Investment thesis

  • SEMBCORP MARINE LTD (SGX:S51) is one of the global leaders in rig building, offshore platforms and specialized shipbuilding and repairs. It is well-positioned to capitalise on a recovery in the oil and gas industry, where sentiment is improving gradually.
  • Better-than-expected new order flow with decent margins will catalyse the stock price.
  • Risks, however, include
    1. higher than expected capex requirements and potentially a need to raise funds,
    2. risks relating to Brazil, and
    3. lower than expected new order flows.

Share price correction since last report –

Slower than expected new order flow –

  • Following S$1.2b of new orders that were secured last year, which included several EPC contracts for new production facilities, new order traction YTD has been slower. This was mainly due to a tender cancellation arising from changes in project ownership, and delays in final investment decisions for several projects.
  • YTD, new contracts won totaled about S$0.6b, vs. S$1.2b for the whole of 2018. Should this trend continue, FY21 may be another loss-making year. Net order book excluding Sete drillships was S$2.1b as at end Jun.

Settlement of drillship contracts with Sete Brasil –

  • Meanwhile, Sembcorp Marine has reached a full and final settlement of the claims under all contracts with Sete Group. Upon the fulfillment of conditions precedent, all seven contracts will be terminated and the parties will mutually release each other from all claims in relation to the contracts.
  • For five of the drillships, Sembcorp Marine will keep all works performed. For the first two rigs that are in more advanced stages of completion, the titles to such works will be apportioned between Sembcorp Marine and Sete Brasil in proportion to payments made by Sete.
  • With the weaker than expected flow of new orders, we tweak our estimates and our fair value slips from S$1.45 to S$1.29.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-10-08
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.29 DOWN 1.450