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

SEMBCORP MARINE LTD (SGX:S51)

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.

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.

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 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.

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.

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.

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.

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.

We retain our target 2021F P/B multiple of 0.7x which we have applied to our estimated 2021 tangible book value of S$0.178/share, thus arriving at our fair value of S$0.125/share.
We believe that a 25% discount to the past 5-year average P/B of 0.96x is reasonable, given that Sembcorp Marine faces uncertainty as to when new order wins may materialise meaningfully in the next few quarters. We highlight that its past-five-year trough P/B of 0.6x equates to S$0.107/share.
See Sembcorp Marine Share Price; Sembcorp Marine Target Price; Sembcorp Marine Analyst Reports; Sembcorp Marine Dividend History; Sembcorp Marine Announcements; Sembcorp Marine Latest News.
Suggest entry price: S$0.105.

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