Sembcorp Marine - UOB Kay Hian 2020-12-14: Fundamental Valuations Unjustified. Downgrade To SELL


Sembcorp Marine - Fundamental Valuations Unjustified. Downgrade To SELL

  • We view Sembcorp Marine (SGX:S51)’s recent strong share-price performance as unjustified as the offshore marine industry remains in bad shape and our bearish outlook remains intact.
  • Sembcorp Marine’s financials will likely deteriorate further in the next 2-4 quarters as it has not won any new orders in 2020. Trading at a 2021F P/B of 0.86x, we deem the stock overvalued.
  • Downgrade Sembcorp Marine to SELL.

Recent Sembcorp Marine share price performance unjustified.

  • In the past month, Sembcorp Marine's share price has been extremely strong, rising by 33% over the 9 Nov 20 to 9 Dec 20 period. In our view, this was due to a turnaround in market sentiment after the announcement of positive vaccine trials in early-November that subsequently led to increased market focus on laggards vs outperformers.
  • However, while regional and global economic recoveries are in sight, spelling a potential boost to oil prices, we highlight that there is still a signficant percentage of rigs globally that are inactive and that number has marginally worsened for jack-ups and semi-subs since Oct 20.
  • In our view, Sembcorp Marine’s current 2021F P/B of 0.9x is unjustified.

Financials likely to deteriorate further.

  • 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 & upgrades business segment is busy, Sembcorp Marine has not won new orders this year, but instead, is witnessing delivery delays into 2021 which will negatively impact its near-term working capital and cash flow.

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 that the fundamentals behind an oil price increase needs to be solid and that the oil price needs to be in excess of at least US$50/bbl over a long enough period for oil companies to then 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 oversupplied globally.

Where could we be wrong?

  • In our view, a potential merger with Keppel Offshore Marine could provide a boost to Sembcorp Marine's share price from a sentiment viewpoint. Fundamentally, Sembcorp Marine’s lack of any new orders this year can only result in weak results in the coming few quarters.

Deteriorating financial position.

  • Sembcorp Marine’s gross profit margin, ROE and ROIC have deteriorated materially since 2011 as a result of lower oil prices and overbuilding in the rig industry.
  • Since 2015, there has only been two years where Sembcorp Marine’s ROE has been positive and even though we are forecasting relatively better ROE and ROIC for 2021 and 2022 – assuming a minimal level of new order wins – ROE will remain negative and losses will continue due to the lack of any new orders in 2020. As a result, we do not foresee any material decline in Sembcorp Marine’s net debt during our forecast period.
  • Given its poor financial conditions, we do not believe that Sembcorp Marine’s shares present a favourable risk/reward ratio at this time.

Macro environment for rig activity remains poor.

  • One of the key metrics that we look at within the rig industry is the operating status of rigs. The percentage of jack-up and semi-sub rigs that are inactive globally has increased incrementally in the past two months while drillships are the only assets that have seen a marginal decline.
  • With one in two semi-subs and drillships inactive and two in five jack-ups out of work, conditions in the rig industry are highly unlikely to turn around in a hurry. Coupled with weak dayrates and utilisation rates, our thesis of a bear market in the offshore & marine industry remains intact. In our view, this bear market will likely persist for at least the next 12-18 months.

Downgrading earnings forecasts for 2021 and 2022.

  • With two weeks left until the end of 2020, Sembcorp Marine has not won any orders and thus its 2021 earnings will be materially impacted. As a result, we have downgraded Sembcorp Marine's earnings forecasts for 2021/22 and expect the company to chalk up greater losses than previously estimated.
  • Our estimate for 2021 has expanded to a loss of S$138m from a loss of S$75m previously, while 2022 could see the company incurring losses of S$43m vs our prior estimate of a breakeven year.

Downgrade Sembcorp Marine to SELL.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-12-14
SGX Stock Analyst Report SELL DOWNGRADE HOLD 0.125 SAME 0.125