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Simons Trading Research

Author: simonsg   |   Latest post: Fri, 16 Aug 2019, 5:27 PM

 

Sembcorp Marine - Throwing in the Towel for Now

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  • SEMBCORP MARINE LTD (SGX:S51) is likely to be plagued by the circular issues of weak orders and operating leverage, balance sheet constraints and competitive landscape.
  • Guidance for widening 2H19 losses and unresolved Brazilian bribery probe further dampen the short-term investment case, in our view.
  • Downgrade to REDUCE with a new Target Price of S$1.16, based on 1.1x P/BV, benchmarking the average trading band in 2H16 when orders were anaemic

Suffering From No Big Bang Orders

  • SEMBCORP MARINE LTD (SGX:S51) guided for widening losses in 2H19F, implying more than S$30m losses per quarter. This is in addition to the unexpected loss of S$8.5m in 2Q19.
  • Simplistically put, Sembcorp Marine had expected orders to come in but they did not, due to tender cancellations and delays in final investment decisions, such as FPSO for Rosebank, Bay Du Nord and Browse development. Costs (staff, R&D and capex) were incurred either to bid for or in anticipation of winning new orders.
  • There have been no sizeable orders above S$200m since May 18. The last significant project was Shell’s Vito Floating Production Unit (FPU) hull, topsides and living quarters. Since then, orders have been fragmented and smaller in size, such as topsides for wind power ropax ferries and LNG bunker vessels.

What if orders come in for 2H19?

  • The damage from cumulative weak orders in 2H18-1H19 is likely to continue into 1Q20F. Even if Sembcorp Marine wins a S$2bn order today, it would take at least nine months to see meaningful profit recognition post engineering and procurement stages. Therefore, we think the market is unlikely to get excited over order wins until
    1. the momentum becomes sustainable or
    2. Sembcorp Marine shows consistent improvement in quarterly EBIT.
  • Having said that, it is only right to point out that Sembcorp Marine is still actively chasing deals. Enquires are broad based, from production to drilling segments. Some notable new projects that Sembcorp Marine has been reported to be bidding for by Upstream include offshore platform for Shell’s Crux gas project in Western Australia and platform jackets for Shwe gas project off Myanmar.
  • We now expect S$500m and S$1bn of new orders in 2019-20 (previously S$1bn-1.5bn). YTD order book stood at S$2.14bn.

 

Aesthetics could help in 2020

  • In FY20, there will be an instant boost of S$48m from the absence of accelerated depreciation incurred in FY19 as a result of the earlier move from Tanjung Kling yard to the new Boulevard Yard. In addition, the drawdown of S$1.5bn subordinate loan from Sembcorp Industries (SGX:U96) to repay bank borrowings could help to re-profile its reported net gearing from 1.44x in 2Q19 to 0.7x aesthetically.

Slash EPS; expect continued losses in 2020F

  • We now expect Sembcorp Marine to report losses of S$71m and S$0.5m respectively in FY19F and FY20F, with the widening losses in 2H19 and c.2.5%-3.3% of EBIT margin for FY20-21F on weak orders.

2Q19 results miss – EBIT took a negative turn

  • Sembcorp Marine's 2Q19 net loss of S$8.5m was a miss vs. our S$1m-2m profit expectation. Consensus had also expected about S$4m of profit. 1H19 net loss was S$6.9m vs. our S$4m profit forecast. EBIT took a negative turn with a loss of S$4.4m, negating the effects of a turnaround since 4Q18. The key drags came from a 10% q-o-q decline in revenue (mainly lower rigs and floaters) as well as net provision for costs, in our view.
  • Sembcorp Marine explained that on a q-o-q basis, there could be a provision write-back on delivered projects and/or prudent cost provisions on existing orders that could swing the margins. We believe there were additional costs added to the budget to carry out existing orders.

Net gearing not at desired level; capex marred improvement in operating cashflows

  • Net debt stood at S$3.3bn of which S$1.5bn will be repaid from the draw-down of a subordinated loan from Sembcorp Industries. The remaining S$0.5bn fresh working capital loan will only be used upon securing of new contracts. We had earlier forecasted a better balance sheet structure with the collections from the delivery of Hereema’s Sleipnir heavy lift crane as well as c.US$100m from Transocean Norge in 2Q19.
  • Notably, operating cashflow improved from a negative S$48k in 1Q19 to a positive S$273m in 2Q19. However, net gearing remained weak at 1.42x in 2Q19 (1Q19:1.47x) due to S$128m capex incurred in the new yard. 1H19 total capex amounted to S$205m, above our S$200m forecast. Recall that the management guided for the FY19 capex to be lower than FY18’s (S$343m), including S$50m-70m for maintenance purposes. Prudent capex is crucial, in our view.

How low can the share price go?

  • We think the current Sembcorp Marine share price may not have factored in a zero order scenario for 2H19. Referring to 2016 when orders were anaemic at S$0.32m, Sembcorp Marine’s share price traded down to a low of 1.05x P/BV and averaged 1.1x P/BV in 2H16 when consensus started to slash order assumptions as reality hit from a weak oil price and an oversupply of rigs.
  • The recent resurgence of negative newsflow revolves around the ongoing bribery investigation further complicates Sembcorp Marine’s investment case. Brazilian police search warrant and a suspicious report lodged with the Commercial Affairs Department (CAD) Singapore in relation to the Car Wash Operation could dampen Sembcorp Marine’s reputation to gun for orders. Sembcorp Marine's share price is likely to be weighed down by this until a settlement is reached, in our view.

Downgrade from Add to Reduce with a lower Target Price of S$1.16

  • Although Sembcorp Marine's share price has retreated by 22% over the past 12 months, we were buying on hopes of new orders and an improvement in balance sheet. The risk of a cash call was also negated by the recent help from Sembcorp Industries’s S$2bn loan.
  • Our main premise for the current downgrade lies in
    1. the disappointing 2Q19 results,
    2. management’s significantly negative view on the company’s 2H19 outlook,
    3. slower order momentum and
    4. the resurgence of negative newsflow from the Brazil bribery investigation.
  • A negative outcome of the Car Wash operation investigation, poorer-than-expected orders and impairment of Brazilian yard are key de-rating catalysts.
  • Sustainable order momentum and quarterly improvement in EBIT trend are key upside risks.

Source: CGS-CIMB Research - 30 Jul 2019

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