Sembcorp Marine - UOB Kay Hian 2022-11-16: Weaker-than-expected Guidance For 2H22; Medium-term Outlook Remains Bright


Sembcorp Marine - Weaker-than-expected Guidance For 2H22; Medium-term Outlook Remains Bright

  • Sembcorp Marine (SGX:S51)’s 3Q22 business update contained weaker-than-expected guidance for 2H22. Though high labour costs were to blame, resulting in our increased loss estimates for 2022, it will not be an issue after end-22.
  • Nevertheless, we maintain our bullish view on Sembcorp Marine as the offshore marine industry remains strong, backed by high commodity prices, with the added benefit of the completion of the merger with KOM in 1Q23.

Profitability delayed for Sembcorp Marine

  • Sembcorp Marine announced its 3Q22 business update which was slightly disappointing as it disclosed higher-than-expected labour costs which would negatively impact 2H22. The higher-cost labour resulted from Sembcorp Marine having to eschew its traditional low-cost markets like India and Bangladesh during the peak of the COVID-19 pandemic last year and instead resort to non-traditional markets. This labour was supposed to be demobilised in mid-22, however as a result of logistics-related delays, this higher-cost labour will only be sent back by end-22.
  • Other issues will impact Sembcorp Marine's profitability in 2H22. Some of the other issues that Sembcorp Marine’s management identified as being the cause of the guidance miss include the timing of new contract wins and its repairs & upgrades segment not receiving as many jobs as expected.
  • During the analyst briefing, Sembcorp Marine also mentioned that while utilities costs have been materially higher on a y-o-y basis, it is trying to manage such costs. The company also highlighted that the current merger proposal with Keppel Offshore & Marine (KOM) has led to higher professional fees in 2022.
  • Repairs & upgrades segment – slower than expected. Despite the fact that shipping activities have resumed as the global economy has gradually opened up in 2022, Sembcorp Marine stated that the residual effect of COVID-19 means that it will take more time and planning for customers to resume their repair and maintenance programmes.
  • Nevertheless, Sembcorp Marine expects a constant base load of LNG carrier repairs, and that its repair & upgrading capacity should be full in 2023 from what it can see at present.
  • Higher gearing reported in 9M22. As at end-9M22, Sembcorp Marine had a net debt-to-equity of 0.53x vs 0.44x as at end-1H22. The higher gearing is the result of higher working capital as the company prepares for the start of construction of its new orders.

Sembcorp Marine's outlook in 2023 remains solid.

  • While Sembcorp Marine has had a record amount of orders in 2022, 2H22 will be a lull period for the company on the construction side as it undertakes a period of front-end engineering and design as well as and mobilisation of the necessary resources, and thus construction will only commence in earnest in 2023.
  • Outlook for order wins. Sembcorp Marine stated that it remains hopeful of winning more orders in the next 3-6 months and highlighted that it continues to increasingly focus on renewables-related projects. In the longer term, the company is targeting around 40-50% of its orderbook to be related to renewables.
  • Sembcorp Marine highlighted that there are other second-hand cylindrical hulls available for conversion into floating LNG (FLNG) or hydrogen production facilities after its recent order win from New Fortress Energy for two of such conversions into FLNG liquefaction facilities.
  • Watch out for re-entry. Assuming that the merger between Sembcorp Marine and KOM is completed in 1Q23, the combined entity will have a market capitalisation of around S$8.3b and a free float of 65%. Based on the market capitalisation of the STI’s current component companies, Sembcorp Marine’s potential size would qualify it for re-entry into the index after an absence of nearly seven years.

Sembcorp Marine – Earnings forecast revision and recommendation

  • Downgrading 2022 estimates. We have expanded our 2022 loss estimate for Sembcorp Marine from S$14m to S$249m to take into account higher labour and other costs as guided by management during yesterday’s analyst briefing. While we have not changed our estimates for 2023 and 2024, we highlight that labour costs should decline in 2023 as Sembcorp Marine’s high-cost labour will be repatriated by end-22.
  • Maintain BUY on Sembcorp Marine with S$0.156 target price. With the Sembcorp Marine/Keppel merger terms largely in place and the uncertainty out of the way, the focus on Sembcorp Marine will be to garner new orders over the next 12 months and add to its orderbook instead of its earnings in 2022. That said, Sembcorp Marine will need to start delivering profits in 1H23 in order to prove that it is able to reliably and profitably construct its projects.
  • Our target book-value multiple for Sembcorp Marine of 1.2x reflects our confidence that it will garner such orders, thus leading to positive share price performance. 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 given the lack of spending by the global oil and gas industry, thus constraining energy supply.
  • See
  • Catalysts for Sembcorp Marine's Share Price: New orders for rigs, offshore renewable installations or fabrication works as well as repairs s for cruise ships and other commercial vessels.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-11-16
SGX Stock Analyst Report BUY MAINTAIN BUY 0.156 SAME 0.156