Sembcorp Marine Ltd: A disappointing year for the group February 26, 2018

PSR Recommendation: REDUCEStatus: DowngradedTarget Price: SGD1.91
  • 4Q17 Revenue and PATMI markedly missed our expectation due to lower unexpected sales volume.
  • Market condition started to improve, but SMM’s profitability remained weak.
  • We downgrade our rating to REDUCE with an unchanged TP of S$1.91, based on FY18e EPS of 4.4 SG cents and a blended 12-month forward PER of 43.4x.



+ Order flows started to pick up in 4Q17: During 4Q17, oil price rallied from US$50/bbl to US$60/bbl, restoring some momentums in the upstream exploration and development (E&P) segment. In Oct-17, the group announced the contract for the disposal of 9 jack-up rigs for S$1.77bn. In Dec-17, it also secured a US$490mn contract of the turnkey engineering, procurement, and construction of hull and living quarters for a newbuild FPSO.  In the same month, SMM signed a letter of content for the construction of the hull and topside and the integration of an FPU.  The group delivered an improvement of new order secured in FY17. Excluding the reselling of the jack-ups, the total amount of new contracts arrived at US$966mn in FY17 (FY16: US$320mn).


– Net order book continued to decline: The FY17 net order book arrived at S$7.58bn (FY16: S$7.84bn). Part of the order book included the S$1.77bn contract for the disposal of 9 jack-ups is expected to translate into minimal profits. The latest contracts secured were mainly from floaters segment that generates a lower profit margin than drilling solutions segment. Meanwhile, floating LNG business remained muted though management strove to translate enquiries into orders.


The operating environment is still challenging. Oversupply continues in the most drilling segments. Even though global E&P spending has started to recover, there are a significant amount of old deliveries from 2014/2015 orders. Therefore, facing the intense competition, SMM will have to bear a lower profit margin in the next couples of years. Over the past few years, SMM has been expanding and upgrading the Tuas Boulevard Yard to cater to increasing demand for LNG and cruise ships repairs and upgrades. Meanwhile, management sees more demand for installation and retrofit of ballast water treatment system in this and next year. We remain upbeat on the non-drilling solutions segment while believing that it will take a longer time to see the turn in drilling segment.

Downgrade to REDUCE with an unchanged target price of S$1.91

We revised down our FY18e EPS (from 5.0 SG cents to 4.4 SG cents) due to the expectation of prolonged weak profitability. Based on FY18e EPS of 4.4 SG cents and blended forward 12-month PER of 43.4x, we derive an unchanged TP of S$1.91 for FY18. We maintain our call to REDUCE.


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Chen Guangzhi
Investment Analyst
Phillip Securities Research Pte Ltd

Guangzhi graduated from Singapore Management University with a Master degree in Applied Finance and from South China University of Technology with a Bachelor degree in Electronic Commerce.

The current sector coverages include Energy, Utilities, and Mining sectors. He has 3 years experience in equity research in both Hong Kong and Singapore market. He is the mandarin spokesperson for Phillip Securities Research in relation to China-related projects and all mandarin seminars and client events.

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