Sembcorp Marine - RHB Invest 2020-05-13: Weak 1Q20 Business Volume, But Priced In

SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - Weak 1Q20 Business Volume, But Priced In

Sembcorp Marine updated that 1Q20 overall business volume is low, due to industry-wide capex cuts and COVID-19. Management guides for overall business activities to further weaken for the remaining year.
Stay BUY, new P/BV-based SGD1.28 Target Price from SGD1.45, 73% upside.
Despite guidance of continued losses over the next few quarters, Sembcorp Marine trades at a low P/BV of 0.7x (vs 5-year mean of 1.39x). The market also expects restructuring if Temasek successfully increases its stake in Keppel Corp (SGX:BN4) (BUY, Target Price: SGD7.40, see report: Keppel Corporation - RHB Invest 2020-04-30: Infrastructure’s Strength Amidst General Weakness).

Industry-wide capex cuts have affected Sembcorp Marine (SGX:S51)’s ongoing negotiations and finalisation of new orders, including the Siccar Point Cambo Floating Production, Storage and Offloading (FPSO) project. The project’s final investment decision (FID) is now postponed to 2021. The effects of COVID- 19 as well as the low oil prices on projects’ FIDs will continue to adversely affect new orders in the foreseeable quarters.

Delays in executing existing orders and lack of new orders have resulted in lower Sembcorp Marine's 1Q20 revenue recognition. COVID-19 has also affected global shipping operations and adversely affected the repairs & upgrades business. Management expects business volumes for all segments to further weaken for the rest of the year.

Sembcorp Marine will defer all non-essential capex to preserve cash flow and manage overall liquidity with prudence and discipline. The company’s current priority is to ensure adequate liquidity to sustain operations and ride through this severe downturn.

Management expects the trend of losses to continue in the foreseeable quarters. We lowered our revenue expectations. We raised our FY20F net losses by 13% to SGD54m. Our FY21F net profit is cut by 13% to SGD41m.

We lower the Target Price to SGD1.28, which is pegged to 1.26x FY20 book value (0.3SD below the 5-year average P/BV of 1.39x). While there are major headwinds, market expectations of restructuring could lift Sembcorp Marine share price, especially upon release of further newsflow.
Even if restructuring is not factored in, we believe there is limited share price downside given the current steep P/B discount vs historical norms.
See Sembcorp Marine Share Price; Sembcorp Marine Target Price; Sembcorp Marine Analyst Reports; Sembcorp Marine Dividend History; Sembcorp Marine Announcements; Sembcorp Marine Latest News.
Downside risks include unexpected deferral of projects, and a further escalation of the COVID-19 pandemic affecting the repairs & upgrades business.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-05-13

SGX Stock Analyst Report BUY MAINTAIN BUY 1.28 DOWN 1.450