Sembcorp Marine - UOB Kay Hian 2021-02-24: 2020 A Bumpy Road To Recovery

SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - 2020 A Bumpy Road To Recovery

Sembcorp Marine reported a difficult year with a net loss of S$583m, an unprecedented low that missed our and consensus estimates.
While Sembcorp Marine expressed positive sentiment on the results call regarding the long-term profitability of its business, the outlook for 2021 continues to remain bearish with losses guided for 1H21.
Upgrade to HOLD with a fair value estimate of S$0.16.

Sembcorp Marine (SGX:S51) reported a 48% y-o-y decline in revenue to S$1.15b in 2020, and a higher y-o-y net loss of S$583m. Excluding the impairments and provisions of S$144m post-tax, the company nevertheless made a net loss of S$439m.
Not for the first time in its history, Sembcorp Marine failed to secure any new orders in 2020 thus resulting in its revenue being severely hit. At end-20, Sembcorp Marine had a net orderbook of S$1.82b of which S$0.31b were related to repairs and upgrading work.

Sembcorp Marine’s shift towards new areas of renewable energy, electrification, the gas value chain, and storage solutions should present new opportunities for growth.
However, Sembcorp Marine guided that it expects losses to continue into 1H21 and unless the company sees meaningful order wins soon, the losses are likely to continue into 2H21. This may be mitigated somewhat by cost savings from Sembcorp Marine’s exit from its Tanjong Kling yard.

Sembcorp Marine does not expect its working capital requirements to be significant going forward as many of the projects that it is working on are based on milestone payments instead of deferred payments, the latter being more onerous on Sembcorp Marine’s balance sheet.
Most of Sembcorp Marine’s existing projects are scheduled for delivery in 3Q21 and thus working capital requirement levels will necessarily drop off from 4Q21 onwards.

Floating offshore wind projects continue to be the main focus for Sembcorp Marine going forward as industry estimates project US$1.5t in investments by 2040. Thus the outlook for new orders is strong.
During results call, Sembcorp Marine's management stated that it will need to be circumspect in accepting jobs as there is a range of profit margins for different types of wind farm projects.
Sembcorp Marine highlighted that it is able to retrofit jack-ups for offshore wind farms and thus is able to leverage on its prior experience to maintain its relevance in other adjacent industries.

Despite the current poor industry dynamics, Sembcorp Marine stated that given the very different levels of expectations of activity in 2021, it is not looking to reduce headcount but instead needs to keep a certain level of engineering talent as new projects or opportunities may arrive. In addition, its pivot to other segments also requires a certain level of headcount.
As of Nov 20, all of Sembcorp Marine's workers were available and thus on a h-o-h basis, its repairs and upgrade business will see better performance.

After the S$2.1b rights issue, Sembcorp Marine’s balance sheet has strengthened considerably and at end-20 its net debt/equity was 0.75x. The management said that its efforts to refinance its near-term debt had been progressing smoothly with S$0.5b refinanced in Feb 20.

Given the continued lack of new order flow, we have further downgraded our earnings estimates of Sembcorp Marine for 2021 to a loss of S$189m and a smaller loss of S$67m in 2022.

Upgrade Sembcorp Marine to HOLD with fair value of S$0.16 based on a target P/B multiple of 0.6x which is a 30% discount to its past 5-year average P/B of 0.88x. We believe that the discount is warranted given the bearish backdrop of a lack of new orders from the offshore and marine sector.
However, we expect overall industry conditions to be incrementally better in 12 months’ time and thus believe that an upgrade to a HOLD rating is warranted.
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With Sembcorp Marine continuing to incur losses in 1H21 and likely into 2H21, we do not see a reason to own Sembcorp Marine yet despite the fact that its yards are back to full capacity and its repairs and upgrades business segment is busy.
On the analysts’ call, the management said that Sembcorp Marine would return to profitability with an orderbook of S$2.5b-4.0b, depending on the size of each individual order and type of project.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-02-24

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