SEMBCORP MARINE LTD (SGX:S51)
Sembcorp Marine - Positive Guidance For 1H22 Results & Better Order Visibility
- Sembcorp Marine’s 1Q22 business update was reasonably bullish with management commenting that 1H22 results should be significantly better y-o-y. In addition, it expects new order wins to come through given that both conventional energy and renewables are bolstered by strong industry tailwinds.
- Sembcorp Marine’s robust rate of deliveries in 1Q22 has led to a material improvement in its balance sheet, with its net debt/equity declining to 0.38x at end-1Q22 from 0.49x at end-4Q21. Maintain BUY.
A strong qualitative update.
- Sembcorp Marine (SGX:S51) issued a 1Q22 business update which, while lacking in revenue or profit numbers, contained bullish comments around potential order wins and better y-o-y results for 1H22 (likely at end-Jul 22). In our view, the tone of the comments are the most positive that we have seen from management in the past three years.
- Executing its current orderbook well. Out of the 17 projects that it is currently working on, Sembcorp Marine is slated to deliver 12 of these in 2022; however with six of these already delivered to its clients, we should expect better operating cash flow and a meaningful narrowing of losses vs 1H21. Indeed in its announcement, Sembcorp Marine guided for 1H22 results to be "significantly better" y-o-y.
- Sembcorp Marine highlighted that as at end-1Q22, its net debt/equity had improved to 0.38x compared to 0.49x just three months ago in end-21.
SembMarine's orderbook update.
- In 1Q22, Sembcorp Marine disclosed that it had won various repairs and upgrades contracts, including three vessels for the US Navy as well as nine containerships from Maersk. As at end 1Q22, Sembcorp Marine had a net orderbook of S$1.75b (which includes repairs and upgrades contracts).
- Muted inflationary impact thus far. On the analyst call, Sembcorp Marine stated that a number of its projects are close to completion and thus with all the necessary equipment and material having been purchased much earlier, there is no inflationary impact.
- In the meantime, its other projects that are about to start have included appropriate escalation clauses within the contracts to take into account inflation. For new tenders, those contracts should allow for inflation adjustments and will be looked at closely by the company to ensure that cost increases are passed onto the customer.
SembMarine's orderbook outlook.
- Sembcorp Marine reiterated its belief that the industry outlook for the offshore marine sector has improved markedly in the past six months and thus it is seeing increased order visibility from this year onwards. Some of the broad areas that the company will focus on are jack-up and floating versions of Wind Turbine Installation Vessels, offshore assets to cater to carbon capture, oil and gas production platforms, and various conversion works including FPSOs, FLNGs as well as conversion works from offshore drilling to wind turbine assets.
- Given the global push towards alternative (ie non-fossil fuel) sources of energy, we should witness increased demand for renewables and thus construction in this area should increase.
- Interestingly, Sembcorp Marine noted that it is in initial discussions for drilling rigs; however instead of using the traditional drilling system, the new design will have a significantly lower carbon footprint with a higher level of electrification of the whole platform.
- Repairs and upgrading business. Management stated that the overall repairs and upgrading business has returned to a much firmer footing vs the year ago period and it has seen a higher level of enquiries across the board. It expects that as higher levels of economic activity return, there should be a similar increase in demand for repairs and upgrades with key vessels being LNG carriers, bulk carriers, naval vessels, offshore support vessels and rigs being the likely customers for repairs.
- On the upgrading front, Sembcorp Marine stated that demand remains strong with ballast water cleaning and pollution controls being the key items for its clients.
Sembcorp Marine - Earnings forecast and recommendation
- Maintain BUY with target price of S$0.156. With the Sembcorp Marine/Keppel Corp (SGX:BN4) merger terms largely in place and the uncertainty out of the way, the focus on Sembcorp Marine will be to garner new orders in 2022 and add to its orderbook. Our target book-value multiple for Sembcorp Marine of 1.2x reflects our confidence that it will garner such orders, which will lead to positive share price performance.
- We expect higher rates of capex spending in both conventional offshore energy and renewables. In our view, the offshore construction cycle for both conventional oil and gas and renewables has room for growth in the next few years, especially since the lack of spending by the global oil and gas industry will constrain energy supply. In addition the war in Ukraine appears to have led to a re-focus by majors such as BP, Eni, Equinor, Shell, ExxonMobil and Equinor towards further investment in offshore Africa.
- For the offshore wind sector, Europe continues to add capacity and is projected by Rystad to add 4.2GW in capacity in 2022 and then almost double again in 2023 to 7.3GW.
- 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.
Adrian LOH
UOB Kay Hian Research
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https://research.uobkayhian.com/
2022-05-19
SGX Stock
Analyst Report
0.156
SAME
0.156
