Sembcorp Marine 2021 - UOB Kay Hian 2022-02-28: A Turnaround Is In Sight; Reiterate BUY

SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Marine 2021 - A Turnaround Is In Sight; Reiterate BUY

While Sembcorp Marine (SGX:S51)’s loss for 2021 was a larger-than-expected S$1.2b due to a high level of provisions, the investment thesis centres around a turnaround story – note the company’s sequential improvement on a h-o-h basis with revenue up 21% and narrowing of losses at the gross and operating levels.

Sembcorp Marine believes that 2022’s results will be significantly better y-o-y and it remains cautiously optimistic that it will be able to win a few major contracts over the next 6-12 months.

A big loss as expected, however a turnaround is in sight, in our view. Sembcorp Marine announced a 23% y-o-y increase in revenue to S$1.9b which was slightly ahead of our estimates; however, its loss of S$1.17b was larger than expected due to higher-than-expected provisions. In addition, it was heartening to note that on a sequential basis, 2H21 showed much better performance despite the shortage of labour: revenue rose 21% h-o-h while losses at the gross profit and operating profit levels narrowed.
2 key highlights from Sembcorp Marine's results were:
1. management’s comment that 2022 will be “significantly better” than 2021, and
2. the labour issues that were prevailed in 4Q21 have been largely solved.
An improved financial position post S$1.5b capital raising. Sembcorp Marine's management reiterated that it has a relatively strong liquidity position with its gearing at 0.49x as at end-21 vs 0.75x at end-20. Importantly, the capital raising proceeds can be used more ably to execute and complete the projects as well as for working capital needs for new orders and projects.

Management stated that the due diligence process has continued and expects an agreement to be reached by end-1Q22. It said that both Sembcorp Marine and Keppel Corporation (SGX:BN4) are working towards the combination with the intention to complete the merger “sooner rather than later”.

Sembcorp Marine’s net orderbook stood at S$1.3b at end-21, with S$1.1.b of its orderbook undergoing construction at present while another S$0.2b relates to ongoing repairs and upgrading projects.
During the analyst briefing, Sembcorp Marine's management commented that it is working on > S$10b worth of orders and that demand from its addressable market has improved tremendously. It was evident during the results call that Sembcorp Marine is keenly aware that it needs to focus on clinching new orders, and it highlighted that there are a handful of large projects worth between S$500m-1b that could be announced in the next 6-12 months.
More concretely, it pointed out that a contract to construct a research vessel for the Brazilian navy is in an advanced stage of negotiations and a result should be expected at the beginning of 2H22.

While Singapore has seen COVID-19 cases numbers at > 25,000 per face any challenges if it wins new orders given that its manpower planning started last year in anticipation of new orders in 2022.

We do not expect the materially higher carbon taxes, announced in the recent Budget 2022, to have a major impact on Sembcorp Marine. For its offshore marine customers, there may be a significant increase in taxes and thus project economics need to increase to cater for this.
On the other hand, we note that renewables projects which have no carbon taxes then become more attractive to Sembcorp Marine’s customers.

We have upgraded our net fortunes. With its S$1.5b rights issue completed, and Temasek’s mandatory general offer at S$0.08/share having lapsed in early-Nov 21, we believe that much of the corporate-level risk has dissipated.
See
Catalysts:
- New orders for rigs, offshore renewable installations or fabrication works as well as repairs and upgrades work for cruise ships and other commercial vessels.
- Merger or JVs with other shipyards.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-02-28

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