Sembcorp Marine - CGS-CIMB Research 2021-05-03: Better Order Outlook, Workers Shortage Risk

SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine - Better Order Outlook, Workers Shortage Risk

Sembcorp Marine is tendering for 10 projects in renewable/gas projects worth between < S$100m and ~S$1bn. Yard is at peak level considering worker constraints.
In its 1Q21 business update, Sembcorp Marine reported a +6% q-o-q order book (ex-ship repair) of S$1.6bn. We estimate recent RWE Sofia project won at ~S$500m.
We keep our 2021F order win forecast of S$1bn. Maintain HOLD but up Sembcorp Marine's target price to S$0.23, based on 0.8x P/BV (-0.5 standard deviation of 2-year average). Net loss guided by Sembcorp Marine for FY21F.

See Sembcorp Marine's announcements. Including ship repair, Sembcorp Marine (SGX:S51)’s order book for 1Q21 stood at S$1.89bn (4Q20: S$1.82bn). Assuming a similar pace of workload in 1Q21, we estimate the recent RWE Sofia Offshore Wind Farm contract for high voltage direct current (HVDC) electrical systems offshore substations to be worth ~S$500m.
As early works for the project were carried out in 2020, Sembcorp Marine could start recognising some revenue from the recent win from 2H21F.

Competition and COVID-19 uncertainty aside, Sembcorp Marine noted that market sentiment has improved with increasing signs of active reviews of FIDs (Final Investment Decisions). It is actively tendering for more than 10 projects in the renewable energy and gas solutions segment worth between less than S$100m (battery-powered coastal vessels) and ~S$1bn (gas production structure). Fixed wind farm structure work similar to Sofia would be in the range of ~S$500m.
A similar number of tenders are in progress for the process solutions segment covering FPSOs (Newbuild Floating Production, Storage and Offloading Vessel), FSOs and FPUs (Newbuild Floating Production Unit). Sembcorp Marine is making inroads into more renewable projects, such as hydrogen and carbon capture technology. This includes the recent MOU with Penguin International (SGX:BTM) and Shell to design a hydrogen fuel cell system for a Roll-on/Roll-off vessel.
We think in the near term, contracts for renewable are likely to be dominated by battery operated vessels/power transmission related/wind turbine installations for fixed windfarm. Meaningful contract contribution from hydrogen/carbon capture, as well as floating windfarm, could be a longer-term story.

Despite worker constraints, Sembcorp Marine has been operating at peak capacity in 1Q21. Current workforce is 16k (vs. pre-COVID-19 of 20k). On average, 16% of its workforce has rest days on weekdays to comply with regulatory safety measures.
Most projects (except for newly-secured in 2021) are 2/3 completed, hence manning requirements are reduced.

According to Transocean, one rig is due for delivery in 4Q21 and the other unconfirmed. We think there could be further delays into 1H22F. To recap, the rigs were awarded in Feb 2014 and deferred for delivery from 2018.
Net gearing for Sembcorp Marine was flattish q-o-q at 0.74x with S$100m drawn from rights issue for working capital in 1Q21.
See
We think downside of fund raising by Sembcorp Marine could be uncontrolled outbreak of pandemic among workforce.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-05-03

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