Sembcorp Marine - UOB Kay Hian 2020-07-16: 1H20 Losses Mount As Shipyard Operations Have Yet To Restart

SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - 1H20 Losses Mount As Shipyard Operations Have Yet To Restart

Sembcorp Marine reported weaker-than-expected 1H20 results with losses that exceeded expectations. Gross margin fell to -22% for 1H20 as the company was unable to book in revenue as its yard was closed due to the COVID-19 pandemic while continuing to incur project costs.
Going forward, the key uncertainty is when its yard will resume operations. We increase our loss estimates for 2020-21.

Sembcorp Marine (SGX:S51) reported a 41% y-o-y decline in revenue to S$906m and a S$192m net loss in 1H20. This loss was worse than our and consensus expectations, and exceeded loss estimates for the full year. See Sembcorp Marine Announcements. As a result of the COVID-19 - related shutdown of its Tuas shipyard from April, the company was not able to book in much revenue in 2Q20 but nevertheless continued to incur project costs.

Apart from the downturn in the offshore marine industry, the key unknown afflicting Sembcorp Marine is when its shipyard can resume operations. The company admitted that it did not have any visibility on this issue as it is very much up to the Singapore government and the relevant ministries to ensure that any resumption of work is done in a safe and responsive manner. The company did not win any new orders in 1H20.

Management said the rights-issue circular will be released ‘relatively soon’ which will outline a more definitive timetable for the rights issue than what we have at present. Management also note that, given its 1H20 results release has taken place two weeks earlier than the original schedule, the timing of the rights issue would also move up by around two weeks. Thus, we expect the EGM to approve the three inter-related resolutions to take place towards the second half of August, at the latest.
See previous report: Sembcorp Industries & Sembcorp Marine - UOB Kay Hian 2020-06-09: A Sea Change.

Sembcorp Marine said its customers fully understand the situation at hand and thus its interaction with them has been amiable and they have been cooperative in discussions around when delivery dates can be rescheduled. We note that a significant number of Sembcorp Marine’s projects are production-related assets and not exploration – thus the end-customers will need the products sooner rather than later.

Although the repairs & upgrades segment saw a 52% y-o-y decline in the number of vessels repaired to 74, revenue grew 5% y-o-y to S$258m. This was the result of higher average revenue per vessel of S$3.49m in 1H20 vs only S$1.6m in 1H19.
Going forward however, this continued success of this segment will be dominated by the balance sheet of the cruise industry, given that the industry is in a downturn. Management commented that the immediate focus is to fulfil the work backlog at hand. For the offshore platform segment, 1H20 revenue grew over 1.6x y-o-y from work on various renewables and oil & gas platforms.

Prior to the COVID-19 outbreak, Sembcorp Marine had over 20,000 workers working at its yard (which included a significant number of subcontractors). However, the mandatory lockdown plus the foreign worker dormitory issue have reduced its workforce to around 1,000 for maintenance and safety. Given that the Singapore government needs to ensure that a second wave of COVID-19 infections does not occur, as seen in other developed countries, there is no visibility for a resumption of yard operations.

In 1H20, Sembcorp Marine recognised S$42m of government grants but the percentage of wage support will decline in 2H20.
We also highlight that the CEO has voluntarily taken a 50% pay cut while the rest of employees have taken a minimum 5% pay cut.

We have significantly increase our net loss estimates to S$261m for 2020 (previously -S$68m) and S$55m for 2021 (previously - S$10m). There is downside risk to our estimates should Sembcorp Marine’s shipyard fail to restart operations in 3Q20.

Maintain HOLD with a lower fair value of S$0.49, which is a 10% discount to its cum-rights price of S$0.54.
We believe that a discount is reasonable, given that the company faces uncertainty as to when its yard can return to full operations. In addition, day rates and utilisation rates for rigs have deteriorated in 1H20 and chances of a recovery in the O&M sector in the near term remain low, in our view.
The industry outlook remains challenging and new order flow may only re-surface in 1H21 in our base-case scenario. This reinforces our view that an upcycle is more than two years away.
Entry price is S$0.40.
See Sembcorp Marine Share Price; Sembcorp Marine Target Price; Sembcorp Marine Analyst Reports; Sembcorp Marine Dividend History; Sembcorp Marine Announcements; Sembcorp Marine Latest News.

It is possible, given that many countries have experienced a second wave of COVID-19 infections. Nevertheless, our base case view is that Singapore will continue to re-open its economy gradually in 3Q20 and that means Sembcorp Marine’s yards will be allowed to resume operations.
Share price catalyst: Resumption of work at Sembcorp Marine’s Tuas shipyard; and new orders for rigs, offshore renewable ns or fabrication works.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-07-16

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.49 DOWN 0.540