Sembcorp Marine - UOB Kay Hian 2020-02-21: 2019 Worse Than Expected; Not Out Of The Woods Yet

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

Sembcorp Marine - 2019 Worse Than Expected; Not Out Of The Woods Yet

  • Sembcorp Marine reported a poor set of results with a net loss of S$137m (2018: S$74m loss) that missed our and consensus estimates. The company also provide very cautious guidance for 2020 and expects losses to continue, but seems moderately upbeat on new order wins this year.
  • We downgrade our earnings estimates for 2020-21 and lower our P/B-based target price to S$1.21. Maintain HOLD.
  • Entry price: S$1.05.



2019 RESULTS


Loss was worse than expected.

  • Sembcorp Marine (SGX:S51) reported a 41% y-o-y decline in revenue to S$2.88b in 2019, and a net loss of S$137m vs our expectation of a S$77m loss. This missed both our and consensus numbers.
  • Profit margins in 4Q19 appeared much weaker than expected – The company attributed this to the absorption of more overheads as well as one-off charges/cost-provisions for certain projects which could potentially be written back upon project completion.

Very cautious guidance for 2020.

  • The company guided that it expects to continue making a loss in 2020, however, we believe that it is being conservative in the current climate where concerns over the COVID-19 outbreak are foremost on the management’s and market’s minds.
  • In addition, the company should continue to realise cost savings from the new yard as well, while accerated depreciation from its old Tanjong Kling yard will cease this year.


STOCK IMPACT


New-order outlook.

  • On the earnings call, Sembcorp Marine stated its belief that with its 4Q19 orders for the Al Shaheen and Tyra oilfields, it believes that its outlook is “a bit better” and further stated that “order visibility has improved and has been more broad-based”. In particular, Sembcorp Marine highlighted:
    1. the gas value chain with LNG bunker vessels specifically mentioned, and
    2. green-energy solutions, eg fuel cell vessels as well as the offshore wind sector which includes manufacturing jackets and topsides as well as offshore wind-installation vessels.
  • Two potential new orders were mentioned during the call – completion of two Sete Brasil drillships at the end of 1Q20 or early-2Q20, and Siccar Point which could be announced in 2H20. Our current forecasts call for S$1.5b of new orders in 2020 which is flat vs 2018’s new orders of S$1.4b.

Repairs and conversions – Highlight of 2019 and likely into 2020 in our view.

  • Revenue in this segment grew 27% y-o-y to S$605m with average revenue per vessel increasing 34% to S$2.16m (2018: S$1.61m/vessel). Sembcorp Marine’s management commented that momentum in this segment has been positive and its cruise ship segment in particular was very active in 4Q with overhaul and repairs.

Announcement for lower S Pass sub-Dependency Ratio Ceiling (DRC) in the Singapore Budget 2020 should not be a major issue.

  • The company highlighted that in the past few years, it has moved toward transformation and digitalization and together with consultations with the Singapore Government, it had anticipated the reduction in foreign-labour quotas. While there will be a negative impact, the company stated that this should be mitigated by their own efforts to-date.
  • In our view, the S Pass component of the company’s workforce should not be a meaningful portion of Sembcorp Marine’s overall headcount.

COVID-19 impact.

  • Sembcorp Marine’s management stated that thus far, there has been no immediate impact on the ground, however, its supply chain may be negatively impacted in the near future with procurement and delivery of long-lead items to Singapore potentially affecting production flow. As a result, the company has been working to redesign workflow to minimize impact.
  • As for consumables, Sembcorp Marine stated that it has adequate inventory for now to cater to its current work plans. The silver lining is that customers have been willing to move their work to Sembcorp Marine’s Singapore yard instead of China yards.


SMM’s balance sheet remains stretched

  • Sembcorp Marine’s balance sheet remains stretched with its current liabilities (as at end-19) at quite elevated levels as it has current loans due in 2020. However, the company is in final discussions with bankers to refinance these loans so it does not view this as a significant issue.
  • In addition, the company has yet to draw down the remaining S$0.5b loan from 62% shareholder Sembcorp Industries.


EARNINGS REVISION

  • We have downgraded our 2020 estimate to a net loss of S$3.3m vs a profit of S$2m previously, while 2021 net profit forecast has been lowered by 35% to S$23.9m on the back of lower profit margin expectations.


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • New order wins for the offshore & marine segment.





Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-02-21
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.21 DOWN 1.400



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