SembCorp Marine - Ending 2015 on a low

■ Company guides for net loss in 4Q15

■ Impact of order deferral/cancellation likely to flow into 2016

■ Reiterate Sell (5); lower target price to SGD1.73

What's new:
Sembcorp Marine (SembMarine) released a profit warning regarding its 4Q15 results after market hours on 1 December. Management now expects to record a net loss for 4Q15 and a significant YoY decline in net profit for 2015. This is due to the lingering challenging operating environment and customers deferring or seeking to defer their rig orders. This will likely result in revenue suspension and a reversal of profits recognised in previous quarters, similar to 3Q15.

What's the impact:
First quarterly loss in a decade. Based on our records, this will be the first time in almost a decade that SembMarine will announce a quarterly loss. This is on the back of a massive earnings miss in 3Q15 as the company suspended revenue recognition for deferred orders, as well as reversed profits recognised in previous quarters. Similar actions will likely be taken in 4Q15, the difference being the larger magnitude of provisions and earnings reversal to be made in 4Q15.

Still in legal dispute with Marco Polo. SembMarine is currently engaged in a legal dispute with Marco Polo Marine (MPM) with regard to the termination of a rig order by the latter that SembMarine contends is close to completion. SembMarine is of the view that the termination by MPM was to avoid its obligation to pay the 2nd disbursement of 10% of the contract price (USD21.4m), and this amount has already been deferred twice.

Likely to announce more deferrals/cancellations. We believe that one of SembMarine’s clients, North Atlantic Drilling (NAD), an affiliate of Seadrill, could also be looking to defer the West Rigel semi-sub which is also scheduled for completion and delivery in 4Q15. NAD, in its 3Q15 results announcement, said discussions with SembMarine were ongoing “regarding alternatives” for the rig. We have highlighted previously that the West Rigel semi-sub is at high risk of being deferred/cancelled due to NAD’s weak financial position.

EPS changes. Due to the latest announcement, we cut our 2015E EPS by 41%, with a forecast of about SGD40m in losses in 4Q15. We also trim our 2016-17E EPS by 2-7% to account for the negative impact of order deferrals/cancellations, which could affect earnings over the next 2 years.

Technical Analysis
Daily Chart
What we recommend:
Based on our EPS cuts, we reiterate our Sell (5) call and lower our 12-month target price to SGD1.73 (from SGD1.83), on an unchanged PER multiple of 10.8x (1SD below past-10-year average) based on our 2016E EPS (previously blended 2015-16E EPS). Key risk to our call: stronger-than-expected operating margin over our forecast period.

How we differ:
Our 2015-17E EPS are 11-44% below the Bloomberg consensus, due to revisions made to our 2015E EPS based on management’s latest guidance as well as our lower operating-margin forecasts. (Read Report)

Read Related Reports
1) Sembcorp Marine - When it rains, it pours by CIMB Research, published on 2 December 2015

2) Sembcorp Marine - Slipping into the red by DBS Group Research, published on 2 December 2015

3) Sembcorp Industries Ltd - Incorporating our latest earnings and target price cuts for SMM by Deutsche Bank Markets Research, published on 2 December 2015

4) Sembcorp Marine - Profit warning; significant cuts to our forecasts and target price by Deutsche Bank Markets Research, published on 2 December 2015

5) Sembcorp Marine - Buy: SMM can absorb recent shocks by HSBC Global Research, published on 2 December 2015

6) Sembcorp Marine - Expect losses in 4Q15 by Maybank Kim Eng Research, published on 2 December 2015

7) Sembcorp Marine - 4Q15 to see net loss‏ by OCBC Investment Research, published on 2 December 2015

Source : Daiwa Capital Markets

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