• Revenue was in line with our expectation.
• Gross profit substantially missed our expectation, mainly due to costs incurred for a floater project which is pending finalisation with the customer. No details were given by the management on this project.
• The divestment of Cosco Shipyard Group Co., Ltd (Cosco) was completed in 1Q17.
• We upgrade our call to Neutral with an unchanged TP of S$1.58, based on a PER of 23.9x, since the last done price of S$1.63 is near our TP. This implies a downside of 3.1% from the last close price.

Results at a glance

Draining order books protract the recovery

In 1Q17, Sembcorp Marine (SMM) secured S$75mn new orders that were from non-drilling segments (Offshore platforms and Floaters). Comparatively, new contracts worth of S$320mn signed in FY16 were from these segment, and $60mn out of which were logged up in 1Q16. Net order book YTD excluding repairs and upgrades totalled S$7.1bn with 26% Y-o-Y drop and 8.8% Q-o-Q drop. As of Mar-17, the drillship contracts from Sete Brasil valued at S$3.1bn out of S$7.1bn remained frozen.

The recovery of in oil price since 3Q16 effectively revitalised upstream drilling and production activities, driving reactivation of idled rigs. However, new flows of capital expenditure on exploration and production will still take time to be injected into the market. Therefore, it remains challenging to solicit large orders from drilling segment. The momentum in the non-drilling segment is a path for new businesses, but the size of contracts may not be substantial to improve profitability in the near term.  In a nutshell, the shrinking order books will drag the recovery, and SMM could have to endure longer than expected.

Near shore gas infrastructure solutions help but take time

According to the management, inquires for near-shore infrastructure solutions have been increasing. Moreover, ongoing reallocation and retaining of manpower are commensurate with the shift towards non-drilling projects. In addition, the development and commercialization of Gravifloat LNG solutions are on track. All of these signal the near-shore gas projects (floating LNG) could vivify the current tardy business. However, it may not see a surge in terms of revenue contribution from the new segment in a short term, but it will relieve to pressure from other segments order books drying out.

Investment Action

Since SMM booked in the gain in divestment of Cosco, we slightly revise upward our forecast of net income to S$137mn and EPS of 6.6 cents in FY17e, compared with our previous forecast of net income of S$130mn and EPS of 6.2 cents. Currently, SMM is trading at a 12-month blended forward PE of 23.9x.

We upgrade our call to Neutral with an unchanged TP of S$1.58, based on a PER of 23.9x, since the last close price of S$1.63 is near our TP This implies a downside of 3.1% from the last close price.