Sembcorp Marine - DBS Research 2020-05-14: Two Steps Forward, One Step Back

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SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - Two Steps Forward, One Step Back

• Expect loss-making trend to continue in the coming quarters.
• Yard activity levels for non-repair business to remain low amidst COVID-19 measures.
• Low oil prices have led to capex cut, which will adversely affect new orders.

Sembcorp Marine 1Q20 business updates.

• Following the abolishment of mandatory quarterly reporting requirement by SGX, Sembcorp Marine (SGX:S51) ceases provision of financial results for 1Q and 3Q but continues to give business updates. See Sembcorp Marine Announcements.
• While no quantitative details were disclosed in the update, we surmise that 1Q revenue should still be comparable to a quarter ago as Circuit Breaker measures in Singapore kicked in from Apr onwards.

COVID-19 impact.

• COVID-19 has resulted in delays in the execution and completion of existing projects as well as lower ship repair volume. During the Circuit Breaker period, shipyard activities in Singapore are mostly shut except for Repair and Upgrades (which account for ~20% of revenue), which are considered essential services.
• With the easing of Circuit Breaker measures, we expect yard activity to pick up in June.

Low oil prices hit capex and order win momentum.

• Current low and volatile oil price levels have resulted in major oil companies deferring their final investment decisions (FIDs) for projects and cutting back their capital expenditure (capex) by 20-30% for 2020, based on our observation. This has significantly affected Sembcorp Marine’s order wins for the foreseeable future. It has yet to clinch any contracts for the year.
• FID for Siccar Point Cambo Floating Production, Storage and Offloading (FPSO) project has been postponed to 2021, from mid-2020 previously. Sembcorp Marine has concluded the exclusive FrontEnd Engineering and Design (FEED) using its proprietary Sevan geostationary circular hull, to be deployed at the Cambo field in the UK Continental Shelf.

Ongoing negotiation for refinancing.

• Sembcorp Marine generated positive cash flow from operations in 1Q. It is finalising with lenders to refinance and re-profile short-term loans with longer-term maturities.
• Sembcorp Marine also assures that it has adequate existing loan facilities to refinance current borrowings as they fall due.

Survival mode; losses to continue.

• In Sembcorp Marine’s outlook statement, it stresses that in the light of the challenging and deteriorating business environment, the current priority is to ensure adequate liquidity to sustain operations and ride through this severe downturn. The group will continue to focus on safe and timely execution of projects and to explore pockets of opportunities less affected by the current business climate.
• Sembcorp Marine expects its losing trend to continue in the foreseeable quarters.

Maintain HOLD; Target Price cut to S$0.72

• Maintain HOLD; Target Price cut to S$0.72, as we lower our valuation multiple peg to 0.7x (2SD below mean) in view of the protracted downturn as oil majors cut capex.
• Sembcorp Marine's 1Q operation updates painted a bleaker outlook. The industry setback will take a toll on near-term order win momentum but accelerate industry consolidation, in our view. While any potential restructuring between Singapore rigbuilders will take time and it is premature to assess the impact without further details, Sembcorp Marine tends to be perceived as a beneficiary.

Where we differ: Less sanguine on privatisation scenario; contract win remains the key.

• We believe yard merger via share-swap or asset injection into Sembcorp Marine are more probable scenarios than privatisation, and therefore trickier to predict Sembcorp Marine’s financial and share price impact. Fundamentally, the critical factor for Sembcorp Marine remains its order wins to restore confidence.
• See Sembcorp Marine Share Price; Sembcorp Marine Target Price; Sembcorp Marine Analyst Reports; Sembcorp Marine Dividend History; Sembcorp Marine Announcements; Sembcorp Marine Latest News. 
• Sembcorp Marine’s 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 first two Sete Drillships and/or new buyers for the other two half-built rigs;
  4. Siccar Point FPSO solutions;
  5. Windfarm-related projects; and 6) other production-related platforms.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2020-05-14

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.72 DOWN 1.350