Sembcorp Marine - Operating margin of 6.6% lowest since 3Q07

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Sembcorp Marine's 9M15 net profit of S$247 mn was below expectations, representing 54% of consensus's FY15 forecast. This was driven mainly by a sharp decline in operating margin from 12.2% in 2Q15 to 6.6% in 3Q15, the lowest level since 3Q07. Management attributed the fall in margin to a negative mix effect with lower jackup revenue recognised.

Revenue declined to S$1.13 bn in 3Q15 from S$1.21 bn in 2Q15, driven by lower revenue recognition as customers requested for deferment in rig delivery. Profit was impacted further by a S$24 mn loss on associates and S$17 mn impairment related mainly to Cosco though partially offset by a tax write-back of S$10 mn.

Sembcorp Marine's net gearing increased further to 0.66x as of 3Q15 from 0.51x in 2Q15, driven by working capital outflow with rig delivery deferment. Perisai has delayed the delivery of its jackup from April 2015 to before April 2016.

We reduce our 2015-17E EPS by 9-22% on lower margin assumptions. We lower our target price to S$2.40 (from S$2.60) based on 11x 2016E P/E. Maintain NEUTRAL.

3Q15 below expectations on weak margin
Sembcorp Marine’s revenue declined to S$1.13 bn in 3Q15 from S$1.21 bn in 2Q15, driven by a suspension of revenue recognition as customers requested for deferment in delivery of rigs. Operating margin fell from 12.2% in 2Q15 to 6.6% in 3Q15, the lowest level since 3Q07. Management attributed the lower margin to operating leverage with a fall in revenue, as well as a negative mix effect with lower jackup revenue recognised. To manage its costs, management noted that it is reviewing hiring of workers in Brazil and has scope to reduce number of subcontractors hired.

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Net gearing increases further as rig deliveries are deferred
Management noted that some customers are deferring rig delivery due to low demand. Perisai is delaying the delivery of its jackup Perisai Pacific 102 from April 2015 to no later than 31 March 2016, while it was reported that Oro Negro has requested for a deferment of three jackups originally scheduled for delivery in 2015. Sembcorp Marine has secured S$2.91 bn of new contracts YTD, including a S$1.5 bn EPC contract in September to build three topsides for the Culzean Field Development in UK North Sea. SMM’s net gearing has increased from 0.51x in June 2015 to 0.66x in September 2015. Management noted that it will review discretionary capex to minimise cash outflow. (Read Report)

Read Related Reports
1) Sembcorp Marine - Short-term pain, long-term gain unsure by CIMB Research, published on 23 October 2015

2) Sembcorp Marine - More deferments by DBS Group Research, published on 23 October 2015

3) Sembcorp Marine - No land in sight by KGI Fraser Research, published on 23 October 2015

4) Sembcorp Marine - Unabated pressure; maintain SELL by Maybank Kim Eng Research, published on 23 October 2015

5) Sembcorp Marine - Lowest quarterly profit since 4Q07‏ by OCBC Investment Research, published on 23 October 2015

6) Sembcorp Marine - A Massive Miss‏ by RHB Research, published on 23 October 2015

7) Sembcorp Marine - Vulnerable to high-risk clients by Daiwa Capital Markets, published on 22 October 2015

8) Sembcorp Marine - Weak 3Q15 results as rig orders get pushed out; challenging prospects by Deutsche Bank Markets Research, published on 22 October 2015

Source : Credit Suisse Asia Pacific Equity Research

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