Sembcorp Marine Ltd: Protracted weakness October 29, 2018

PSR Recommendation: NEUTRALStatus: UpgradedTarget Price: SGD1.65
  • 3Q18 revenue and net loss exceeded our expectation due to an S$34mn loss on the sale of a semi-submersible.
  • Repairs and Upgrades segment secured a big contract.
  • Order flow, profitability and guidance remain weak.

We revised down our FY18e BVPS (from SG$1.1 to SG$1.0) due to the loss on the disposal and the lower margin assumption. Based on the 5-year average PBR of 1.6x, our revised TP is S$1.65 (previously S$1.70). It is worth mentioning that the historical PBR low was around 1.0x. We upgrade our recommendation to NEUTRAL due to the recent price correction.
Positives

+ A big contract under Repairs and Upgrades segment in 3Q18: In Sep-18, SMM was awarded the biggest technology retrofits contract to date. The contract was granted by Maran Tankers for the installation of marine scrubbers and ballast water management system on 13 of the Greek owner’s vessels. With this contract, SMM has an order book of four marine scrubbers and 23 ballast water management system. Revenue for this segment was S$336mn with a 5% YoY drop in 9M18. The average revenue per vessel surged by 35% YoY to $S1.46mn, offsetting the decrease in the number of vessels repaired.

Negatives

Hardly see a turnaround in the near term: Brent crude oil price averaged US$78/bbl (up 44% YoY) in 3Q18, which supported the recovery of upstream drilling activities. Management believed the capex on global exploration and production (E&P) would continue to improve. However, the over-supply of offshore rigs and vessels takes a longer time to generate new order flows in the sector. Meanwhile, margins remain compressed due to intense competition. Management expects the trend of negative operating profit to continue for a few more quarters. 

Orders book dwindling: The net order book continues to decline (3Q18: S$6.4bn vs FY17 (restated): S$8.4bn). New contracts secured YTD came from Floaters segment, amounting to S$730mn (FY17 Floaters: S$911mn). Though management is optimistic about the increasing enquiries of LNG projects, there is no contract announced so far.

Outlook

It is encouraging that oil price was back to four-year high recently. However, we believe the sustainability of the current level (c.US$80/bbl) matters. Two key factors are directing the recovery of SMM, capex on E&P and vibrancy of upstream drilling and production activities (measured by charter rate and utilisation rate). Since SMM’s business is order book- driven, we have not seen any evident signal that its profitability will turn around in the near turn. In a nutshell, the survival mode is still on.  

Upgrade to NEUTRAL with a lower target price of S$1.65

We revised down our FY18e BVPS (from SG$1.1 to SG$1.0) due to the loss on the disposal and the lower margin assumption. Based on the 5-year average PBR of 1.6x, our revised TP is S$1.65 (previously S$1.78). It is worth mentioning that the historical PBR low was around 1.0x. We upgrade our recommendation to NEUTRAL due to the recent price correction.

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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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