Sembcorp Marine 3Q20 Business Update - UOB Kay Hian 2020-11-12: Outlook Still Bearish; Upgrade To HOLD On Valuation


Sembcorp Marine 3Q20 Business Update - Outlook Still Bearish; Upgrade To HOLD On Valuation

  • With the company continuing to incur losses in 2H20 and likely into 1H21, we do not see a reason to own Sembcorp Marine yet. While its yards are back to full capacity and its repairs & upgrade business is busy, Sembcorp Marine has not won new orders this year. Instead, it is witnessing delivery delays into 2021 which will affect its near-term working capital and cash flow.
  • Upgrade Sembcorp Marine to HOLD on valuation grounds.
  • Suggest entry price: S$0.105.

Sembcorp Marine's 3Q20 Business Update

Bearish update.

  • Sembcorp Marine (SGX:S51) provided a weak 3Q20 business update, guiding it had incurred losses in 3Q20 and that the losses will continue into 4Q20. See Sembcorp Marine Announcements.
  • Importantly, Sembcorp Marine said most of its projects will be delayed from 2020 into 2021, thus affecting revenue recognition and cash flow. As expected, these delays were due to COVID-19 shutdowns at its yards in 2Q20 which have affected itself, suppliers and clients, with disruptions to the supply chain and lead time for key equipment going up.

Yards back to normal.

  • Sembcorp Marine reported that its yards have returned to almost full capacity and operations have resumed, with new procedures for rest days as well as COVID-19 testing. Prior to the pandemic-related shutdown, Sembcorp Marine had a workforce of 20,000 which included its own workforce and third-party contractors.

Some good news for repairs & upgrades (R&U) segment.

  • Sembcorp Marine is currently undertaking S$330m of ongoing jobs and new orders secured during the quarter.
  • On the analyst call, management said this segment had “a good 3Q20 overall” and given the work backlog at present, it needs to manage its capacity constraints.
  • Prior to COVID-19, the company saw R&U revenue increasing sequentially from 3Q19 to 1Q20 and thus it is hopeful that this trend can continue from 3Q20.

We do not believe it is time to buy Sembcorp Marine yet, given that it is a second-derivative play on oil prices.

  • We believe the fundamentals behind an oil price increase need to be solid and that the oil prices need to be at least above US$50/bbl over a long enough period for oil companies to have the confidence to spend on offshore exploration. In our view, current oil prices are not high enough for exploration capex to resume in a meaningful way while rigs are in oversupply globally.

Management commentary on industry demand and competition.

  • Compared to its competitors, Sembcorp Marine has not won any new orders this year with management stating that it is mindful of margins, price points and payment terms and thus will not bid aggressively, and may even withdraw from a potential project.
  • Key offshore vessel niche areas where Sembcorp Marine highlighted a demand-supply gap was in the 10-15MW wind installation vessels, ‘green’ ferries as well as gas-to-power vessels.
  • On the downside, COVID-19 has battered the cruise industry and thus, Sembcorp Marine has not seen an increase in repairs and upgrades for this segment.

Stronger for longer.

  • Having raised a net S$600m from the rights issue in Aug 20, and thus significantly lowering its net gearing from 1.35x as at end-1H20 to 0.45x post-rights issue, Sembcorp Marine is now in a stronger position compared to six or even 12 months ago.
  • On our estimates, the lifeline of S$600m will be able to last Sembcorp Marine for at least two years, based on our forecasts for operating expenses and maintenance capex.
  • Management commented that its banks now see the company in an even more positive light, given its stronger balance sheet. However, it conceded that its cash flow in 2020 will be affected by delivery delays.

Our cautious stance due to offshore & marine (O&M) industry headwinds

  • Day rates and utilisation rates for rigs have continued to deteriorate in 2H20 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 resurface in 1H21 at the earliest, in our base-case scenario. This reinforces our view that an upcycle is more than two years away.

Upgrade Sembcorp Marine to HOLD with lower fair value estimate

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-11-12
SGX Stock Analyst Report HOLD UPGRADE SELL 0.125 DOWN 0.154