Sembcorp Marine - CGS-CIMB Research 2020-07-15: Restrained By Lockdowns

SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - Restrained By Lockdowns

Sembcorp Marine’s 1H20 net loss of S$192m was wider than expected. We had expected a S$119m loss for FY20F, while consensus expected an S$84m loss.
Gross loss of S$1.1bn (-21%) was due to almost 3 months of zero activity. Ship repair and windfarm projects were executed profitably.
We cut our EPS by 120-161% for FY20-21F as we deferred revenue recognition. Reiterate HOLD, with Target Price lowered to S$0.46 (0.5x CY20F P/BV).

Sembcorp Marine (SGX:S51)'s 1H20 revenue fell 41% y-o-y and 32% hoh to S$906m. The government’s Covid-19 circuit breaker measures led to yard shutdowns since Apr 20, resulting in almost zero production for three months. At that time, there were only 850 essential workers in the yard, mainly for repair work and yard upkeep (compared with its pre-Covid staff strength of c.20k).
Currently, workers and subcontractors are slowly returning to work after obtaining authority approvals on the living conditions at worker dormitories.
The 1H20 gross loss of S$1.1bn took into account the effects of lockdowns and blanket delays for projects. Three months of government grants (S$42m) and lower depreciation (-21% y-o-y) did not help.

Other than ship repair, key projects in 1H20 included the two Transocean drillships, which generated S$141m of drilling revenue in 1H20 (-43% y-o-y). Delivery of these rigs ( > 50% complete) has been postponed to 1H21 (previously 2H20 and 1H21).
Production segment’s 1H20 revenue of S$318m (-54% y-o-y) was mainly from floating production storage offloading (FPSO)/floating production unit (FPU) projects for Shell, Petrobras, Shpoorji and Karish.
Offshore platform’s revenue grew 165% y-o-y, thanks to the Hornsea II and Formosa windfarm projects secured in 4Q19, which were executed profitably.

Ship repair’s 1H20 revenue grew 4% y-o-y and 47% hoh to S$258m, mainly due to better mix of projects. These include the upgrade of floating storage and regasification units (FSRU), floating storage units (FSU), as well as cruise ships, LNG vessels and scrubbers installations.
Sembcorp Marine’s order book stood at S$2.2bn, which includes S$280m of ship repair work. The outlook for ship repair is positive as customers generally want to expedite work. Sembcorp Marine is only limited by workforce constraints.

Net gearing stood at 1.35x as at end-June 20 (Dec 19: 1.14x).
Expected completion of the rights issue and demerger from Sembcorp Industries (SGX:U96) (see report: Sembcorp Industries - CGS-CIMB Research 2020-06-09: Parting Ways With Sembcorp Marine) will be brought forward by two weeks (the EGM was previously scheduled for early-Sep).
Our Target Price (excludes the rights issue) is a 30% discount to -0.5 sd of its long-term mean, given the challenging operating environment, but downside is capped by Temasek’s direct stake of 30-58% if minority shareholders of Sembcorp Industries and Sembcorp Marine do not take up the rights.

Net cashflow was -S$122m in 1H20, hence the S$2.1bn equity rights issue is crucial. Sembcorp Marine’s workforce is being right-sized in tandem with project load, but we gather that it is not aggressive as the company prepares for resumption of full activities.
The CEO volunteered to undergo a 50% pay cut, with a 15% salary reduction for senior management, 10% for middle management, and 5% for the rest of the employees.
Capex has been cut significantly to S$58m in 1H20 (1H19: S$205m).
See Sembcorp Marine Share Price; Sembcorp Marine Target Price; Sembcorp Marine Analyst Reports; Sembcorp Marine Dividend History; Sembcorp Marine Announcements; Sembcorp Marine Latest News.
Upside risks: stronger orders and potential M&A with KEP O&M.
Downside risk: unsuccessful rights issuance and poor execution of contracts.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-15

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.457 DOWN 0.800