Sembcorp Marine - UOB Kay Hian 2020-05-14: A Sombre 1Q20; Rough Times Ahead

SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - A Sombre 1Q20; Rough Times Ahead

Sembcorp Marine provided a sombre 1Q20 update on its business which has been affected by both the COVID-19 pandemic as well as materially lower oil prices. The company did not win any new orders during the quarter, and appears bearish about its prospects going forward due to capex cuts and/or deferrals by oil companies.
We downgrade Sembcorp Marine's earnings for 2020-22 as we do not expect a quick recovery in Sembcorp Marine’s various businesses.

Sembcorp Marine (SGX:S51) provided a sombre 1Q20 business update and 2020 outlook stating that it saw lower revenue recognition during the quarter as a result of lower overall business volume for the group. While Sembcorp Marine managed to record positive cashflow from operations, it also said that its interest expenses were higher on a y-o-y basis.

Sembcorp Marine cited the double whammy of the COVID-19 pandemic coupled with the collapse in oil prices which materially affected the company in 1Q20. Specifically, it stated that new rig and platform orders are “significantly affected” for the foreseeable future due to oil companies delaying their capital expenditure plans to 2021.
Sembcorp Marine's net orderbook as at end-19 was S$2.44b; we estimate this did not materially decline by end-1Q20.

According to industry sources, the number of new rig enquiries have dropped significantly in the past two months due to the materially weaker oil prices. Only one new rig tender in Asia was released in the past month, and even then most of the business has seen contract renewals of incumbent rigs, not deployment of new rigs. Industry news flow has been dominated by rig-contract terminations, cancellations and delays.
On 28 Apr 20, Diamond Offshore, with 11 semi-subs and four drillships, declared bankruptcy underscoring the difficulties faced by Sembcorp Marine’s client companies.

Both jack-up and semi-sub day rates appear to have recently hit inflection points and are both trending down. Jack-up day rates have declined 5% from its 2020 peak while utilisation levels have fallen 5 ppt to 66.4%. Semi-subs (3,000-5,000ft) have fared worse with day rates falling 11% from 2020 highs, while utilisation rates have collapsed by 21 ppt to 42%.

Sembcorp Marine disclosed that its staff strength at its shipyards have been reduced from 22,000 at the beginning of the year to 850 as at end-1Q20. While some repairs and ugrading works are still ongoing, its shipyards are essentially operating with a skeleton crew involving emergency response teams, security staff, and facilities and utilities management employees only.
While the ‘circuit breaker’ (CB) measures could be relaxed after 1 June, we do not believe that the Singapore Government will allow staff levels to normalise until the infection rate within the foreign-worker community is lowered significantly from the current 700-900 infections per day.

On our estimates, the company will still have a relatively high net debt/equity of 129% at the end of this year (including the subordinated loan from its majority shareholder Sembcorp Industries (SGX:U96)). Sembcorp Marine said it is in the process of refinancing its debt that is due this year and to re-profile its loans to longer maturities. We do not expect the company to run into liquidity issues given its cash holdings and that its indirect major shareholder is Temasek.

We expanded our Sembcorp Marine's net loss estimate for 2020 from S$3m to S$64m to take into account the continued lack of new order flow and more importantly the shuttering of its shipyard due to the CB. In 2019, Sembcorp Marine’s net loss and gross margin was -S$137.2m and -3.2% respectively.
For 2020, we have lowered our gross margin estimate from +2% to -1%. We have also factored in a slight loss in 2021 as a result of the lack of orders this year.

Maintain HOLD and lower our target price to S$0.81 (S$0.93 previously). We have lowered our target P/B multiple from 1.0x to 0.9x which we believe takes into account the expected lack of new orders in the near to medium term as well as the uncertainty around resumption of activity at the company’s shipyards.
At present, Sembcorp Marine’s one-year-forward P/B multiple of 0.74x is already 2SD below its 5-year average P/B of 1.56x. On 23 Mar 20, the company’s P/B multiple troughed at S$0.62 which equates to -2.5SD below its 5-year average P/B.
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 share price catalyst:
- Ending of the CB and lower infection rate among Singapore’s foreign worker population, allowing resumption of work at Sembcorp Marine’s shipyards
- New orders flow by 4Q20 if oil prices stage a recovery and stabilise at above US$40/bbl.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-05-14

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.81 DOWN 1.210