Sembcorp Marine - DBS Research 2020-02-20: Not Out Of The Woods


Sembcorp Marine - Not Out Of The Woods

  • Sembcorp Marine's 4Q19 losses worse than expected; loss-making trend to continue into 2020.
  • Net gearing has crept up to an alarming 1.8x.
  • Order wins remain the critical factor to turn around the operations; potential restructuring exercise is unclear.
  • Maintain HOLD; Target Price lowered to S$1.35.

Sembcorp Marine reported S$77.7m loss in 4Q19

  • Sembcorp Marine (SGX:S51) reported S$77.7m loss in 4Q19, worse than S$52.6m market expectations of ~S$30m loss a quarter ago and our/ loss. Revenue was sequentially lower at S$623.5m (vs S$717.2m a quarter ago). Core “gross margin” of -11.6% vs -6.4% a quarter ago) is probably one of the worst we have seen in 20 years. Management attributes this to higher overhead costs for the new projects secured in 4Q19 and net cost accruals for ongoing projects.
  • The huge losses in 2H brings FY19 net loss to S$137.2m, nearly doubled of FY18’s S$74m.

Loss-making trend to continue in 2020; aggravated by COVID-19 impact.

  • Management guided for losses to continue in 2020 as competition continues to be intense and business activity levels remain low for all segments except for repairs and upgrades. Challenges remain, in particular supply chain disruptions due to the COVID-19 virus outbreak, which could affect execution of projects such as hull construction at partnering yard in China. There might be delays in procurement and delivery of certain equipment.
  • On a positive note, while face-to-face meetings are constrained by the outbreak, negotiations with potential customers continue to be carried out via other channels of communication.
  • Management also remains hopeful to shrink losses this year. We believe that cost savings from the return of Tanjong Kling yard (~S$50m depreciation and other overhead costs) should help to mitigate losses.

Orderbook running low, standing at S$2.44bn as at end- 2019.

  • This implies ~1-year revenue coverage, which is less than the desirable level of 2-2.5x.
  • Sembcorp Marine secured ~S$1.5bn worth of new orders in 2019:
    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;
    3. newbuild of FPU hull and top side worth approximately S$270m in Nov-2019;
    4. offshore platform fabrication works totalling S$550m in Dec-2019; and
    5. scrubber and ballast water management system retrofits amounting to ~S$100m .
  • While contract wins have been lagging our expectations, Sembcorp Marine is 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.

Major contracts in the pipeline

  • 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. FSPO solution for Siccar Point Energy E&P Ltd – management is optimistic that customer could reach FID as soon as mid-2020. Sembcorp Marine has concluded the exclusive Front- End Engineering and Design (FEED) using its proprietary Sevan geostationary circular hull, to be deployed at the Cambo field in the UK Continental Shelf.
    3. Sete drillships: Following the settlement with Sete in Oct- 2019, new owner - Magni is taking over the two most advanced rigs built by Sembcorp Marine (and two from Keppel). We expect orderbook accretion for the remaining works to complete the rigs. In addition, Sembcorp Marine is in negotiations with potential buyer for the third and fourth half-built Sete drillships, which will not only recoup the costs incurred but also results in new orders.
    4. SeaOne’s preliminary study for compressed gas liquid (CGL) carrier has been completed. According to an Upstream article on 18 Oct, 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, SMM could secure a contract for two such carriers worth a total of S$800m;
    5. Windfarm projects. Management is optimistic on growing renewable segment especially offshore wind farm projects.
    6. 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 1.82x by end-2019 from 1.61x in 3Q19 and 1.44x at end-2018.

  • While the current gearing level is on the high side, excluding the S$1.5bn subordinated loan from parent, net gearing would have been 1.1x. Sembcorp Marine expects to receive the remaining US$100m payment for the ex-West Rigel semisub early this 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 Nov-2017 and Jan-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 Corp (SGX:BN4) in Oct-2019 has fuelled speculation of a restructuring among Sembcorp Marine, parent Sembcorp (SGX:U96), and Keppel Corp. 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 will only be carried out after Temasek obtains its desired 51% stake in Keppel Corp, which could take at least another 3-9 months.

Brazil corruption update - no implication on shipyard thus far.

  • Sembcorp Marine updated in early Feb-2020 that the Ministério Público Federal in Brazil (“MPF”) had filed charges against Sembcorp Marine’s former Brazilian agent - Mr Guilherme Esteves de Jesus (“GDJ”) for money laundering and ex-employee Mr Martin Cheah Kok Choon (“Martin”) for money laundering and corruption in connection with certain drilling rig construction contracts entered into by subsidiaries of the company with Sete Brasil in 2012.
  • Martin is the former President of Estaleiro Jurong Aracruz Ltda (“EJA”), Sembcorp Marine’s Brazilian subsidiary whose employment with the SCM group was terminated in Jun-2015. GDJ was engaged by Sembcorp Marine’s subsidiaries as consultants in Brazil, which such contracts have been been suspended by Sembcorp Marine group indefinitely.
  • Sembcorp Marine will be lodging a further suspicious transaction report with the Commercial Affairs Department of the Singapore Police Force.
  • The above charges filed against Martin and GDJ are in their personal capacities and not against EJA. Furthermore, Sembcorp Marine clarifies that it is not aware of any other employee who is under ongoing investigations by the Brazilian authorities related to Operation Car Wash. Judging from the points above, it appears that there is no implication on the company so far. The conclusion of the corruption case between GDJ and Martin will remove an overhang for Sembcorp Marine.

Earnings revisions.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2020-02-20
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.35 DOWN 1.400