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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 15 Aug 2019, 4:26 PM

 

Sembcorp Marine 2Q19 - No Silver Lining Yet Within the Gloomy Clouds

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  • SEMBCORP MARINE (SGX:S51)’s 2Q19 revenue of S$731m (-55% y-o-y) and net loss of S$8.5m were below our and market expectations. While 2Q19 gross profit margin recovered y-o-y to 0.6% (2Q18: - 2.9%), this was sequentially worse than the 2.7% in 1Q19.
  • Given that Sembcorp Marine only managed S$175m in new orders to date, management was decidedly downbeat at the analyst briefing, guiding for continued weakness in 2H19 and possibly into 1Q20.
  • Maintain HOLD. Target price: S$1.32. Entry price: S$1.25.

1h19 Results

Tough conditions persist.

  • With continued low overall business volumes, Sembcorp Marine reported a weak 2Q result with net loss of S$8.5m negatively impacted by accelerated depreciation of its old Tanjong Kling yard (TKY) and lower revenue from rig & floater construction (-61% y-o-y), and offshore platform projects (-60% y-o-y). The repairs & upgrades business saw a 13% y-o-y increase in revenue, but this was not enough to offset the poorer performance from the above business units.
  • Weak financial outlook in 2H19 is mainly the result of:
    1. the poor order flow in 1H19 means that Sembcorp Marine will not be able to recognise first-stage revenues in new projects in 2H19, and also
    2. accelerated depreciation costs from the closure of TKY.
  • Note that the medium-term outlook appears brighter as 2020 earnings will not be impacted by the accelerated depreciation issue, while cost savings in excess of S$40m is expected to be realised by operations at the new Tuas yard.

A subdued analyst briefing.

  • Given the near-term guidance for weak financial performance over the next 2-3 quarters, the analyst briefing was understandably subdued. While the company is hopeful of enquiries translating to new orders in 2H19, it pointed to business volumes being "significantly below peak levels". Its poor order flow to date has been the result of delays in its clients’ projects as well as tender cancellations due to changes in ownership of various projects.

Stock Impact

Outlook for new orders

  • Sembcorp Marine remains hopeful that some of the enquiries it is seeing will translate to new orders in the next few quarters. In particular, it pointed out that the volume of enquiries for LNG-powered vessels has increased post the successful completion of the LNG-powered Sleipnir semi-submersible crane, the largest floating crane globally.
  • LNG-related vessels such as LNG bunkering or dual-fuel vessels have also seen an increase in enquiries.

Balance sheet concerns over

  • In our view, Sembcorp Marine’s balance sheet issues are largely over given the strong support that its 61% shareholder, Sembcorp Industries (SGX:U96), has shown via the S$2b subordinated loan. The company will need to prudently manage its overheads in the current weak industry environment and we believe it has been doing so as it has been ‘rightsizing’ its operations.

Earnings Revision / Risk

Forecasting a full-year loss for 2019.

  • We have lowered our earnings forecast for 2019 to a loss of S$18m (NPAT of S$48m previously).
  • We have also meaningfully lowered our 2020E NPAT forecast by 44% to S$28m.

Orderbook forecast

  • We forecast that Sembcorp Marine will receive S$0.8b and S$1.2b in new orders for 2019 and 2020 respectively.

Valuation / Recommendation

Maintain HOLD

  • We resume coverage on Sembcorp Marine with a HOLD rating and an updated DCF-based fair-value price of S$1.32.
  • At our fair value, the company would trade at 1.2x P/B based on our 2020E forecast. While the company’s one-year forward P/B valuation is already 1SD below its 10-year average of 2.7x – and near its historic low of 1.0x – we believe that the ongoing Brazilian-corruption investigation will remain an overhang on the stock.
  • Entry price is S$1.25.

Risks

  • Downside risks include lower-than-expected orderbook wins for its O&M segment, and lower long-term oil and gas prices which would negatively impact exploration & production spending. Meanwhile, upside risks include a smaller-than-expected settlement of the corruption investigation and increased oil-industry spending.

Negative earnings revision momentum

  • We note that going into the 1H19 results, consensus earnings were on the high side, in our view. We believe that Sembcorp Marine’s earnings-revision momentum may continue to be negative in the next week or so as forecasts are adjusted down.

Share Price Catalyst

  • Further strength in new order wins for the O&M segment, particularly for production and LNG-powered and LNG-related assets.
  • Resolution of its Brazilian corruption enquiry. In our view, a settlement of the corruption enquiry, either via a fine or similar, would remove a material overhang on the stock.

Source: UOB Kay Hian Research - 31 Jul 2019

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