Sembcorp Marine - DBS Research 2019-11-14: Still Awaiting Order Wins

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

Sembcorp Marine - Still Awaiting Order Wins

  • SEMBCORP MARINE (SGX:S51)'s 3Q19 losses wider than expected; loss-making trend to continue into 4Q19.
  • Order wins is the critical factor to turn around loss-making operations.
  • Potential restructuring, if any, is unclear.
  • Maintain HOLD; Target Price lowered to S$1.40.



Maintain HOLD; Target Price trimmed to S$ 1.40, following earnings revisions, still based on 1.3x FY20F P/BV.

  • Sembcorp Marine's share price has been on a roller coaster ride, popping 18% on yard merger optimism at end-Oct, before giving back half of the gains.
  • Any potential restructuring will take time and it is premature to assess the impact without further details. We believe a further re-rating catalyst hinges on contract win momentum, which has been lagging expectations during the past two years.
  • We prefer parent SEMBCORP INDUSTRIES (SGX:U96), as a safer proxy to the O&M sector given that 60% of its valuation is from the utilities business, which is relatively defensive and undervalued.


3Q19 worse than expected


SMM reported S$52.6m net loss in 3Q19, worse than our expectations of ~S$30m loss.

  • Sembcorp Marine's 3Q19 loss widened from ~S$8.5m a quarter ago despite similar level of revenue (excl rig sale effect) at S$717.2m (-8% y-o-y; -1% q-o-q). Core “gross margin” of -6.4% is probably one of the worst seen in 20 years. See Sembcorp Marine Announcements.
  • Management attributes this to more prudent margin recognition and higher cost accruals especially on the rigs and floaters especially those first-time projects due to learning curve. This huge loss brings 9M19 net loss to S$59.5m.

Loss-making trend to continue.

  • Management guided that the loss-making trend will continue into 4Q19 and full year losses will be larger than last year, which is a deterioration from previous guidance of similar losses as FY18.
  • Given sluggish contract wins thus far this year, we believe core losses will likely persist into 1H20 as well, partly mitigated by cost savings from the return of Tanjong Kling yard (~S$50m depreciation and other overhead costs).

Orderbook running low, stood at S$2.4bn as at end-Sep, vs S$2.2bn a quarter ago.

  • This implies ~1-year revenue coverage, which is less than the desirable level of 2-2.5x.
  • Sembcorp Marine secured S$845m worth of new orders YTD :
    1. newbuild project of a 12,000cbm LNG bunker vessel and repair & modernisation works on 13 cruise ships valued at S$175m in 1Q19;
    2. construction of offshore windfarm jacket foundations, FPSO conversions, FSU/FSRU upgrade/conversions and cruise ship upgrade totalling S$400m in 3Q19; and
    3. newbuild of FPU hull and top side worth approx. S$270m in Nov-2019.
  • While YTD contract wins are lagging our expectations, 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.
  • The major contracts in the pipeline that we are expecting include the following:
    1. The potential first customer for Sembcorp Marine’s Gravifloat LNG exporting Terminal – in Aug-2019, Poly-GCL tied up with new partner, China Communications Construction Company (CCCC), to invest in a majority stake in the project. This could breathe new life into the project that has been delayed for years and hopefully brings Sembcorp Marine 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. An exclusive Front-End Engineering and Design (FEED) contract has been signed with Siccar Point Energy E&P Ltd to deliver a floating production, storage and offloading (FPSO) design solution for the Cambo field in the UK Continental Shelf, based on Sembcorp Marine’s proprietary Sevan geostationary circular hull.
    4. There continues to be some niche demand for semi-submersible rigs (typically S$400-500m each) in the mid-water space, and Sembcorp Marine may benefit from this.

Net gearing inched up to 1.61x from 1.42x a quarter ago.

  • While the current gearing level is on the high side, it is still manageable. Excluding the S$1.5bn subordinated loan from parent, net gearing would have been 0.96x. 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 interest and expected improvement in cash flow.


Jumping the gun on yard merger speculation?

  • Temasek’s pre-conditional partial offer to gain majority control of Keppel Corporation (SGX:BN4) at end-Oct has fuelled speculation of a restructuring among Sembcorp Marine, parent Sembcorp Industries, and Keppel. We opine that it is premature to identify a beneficiary at this juncture, given the various probable permutations on how the potential merger could be done, pricing, ownership etc.
  • In addition, such a proposal will take time as a strategic review on Keppel Corporation will only be carried out after Temasek obtains its desired 51% stake in Keppel Corporation, which could take at least another 6-12 months.
  • See also report: Sembcorp Group - Back To Fundamentals.


Earnings revisions.

  • We lowered our margin assumption by ~2ppts in FY19/20F. We now expect losses in FY19F to widen from S$54m to S$89m in FY19F, and FY20F earnings to swing to a loss of S$4m from profit of S$27m. The narrower loss in FY20F is predominantly due to the absence of a S$48m accelerated depreciation charge in FY19F.


Valuation:



Where we differ: Less sanguine on privatisation scenario; focus is on contract wins.

  • We see a yard merger via share-swap arrangement as more probable than a privatisation scenario, and therefore this makes it trickier to predict Sembcorp Marine's share price direction on any M&A. We believe the critical factor for Sembcorp Marine at this juncture is order win recovery; its order pipeline includes,
    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;
    3. additional works for Sete Drillships; and
    4. production-related platforms.





Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2019-11-14
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.40 DOWN 1.450



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