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Sembcorp Marine - Look beyond weak near-term earnings

Shared By Stock Fanatic on Thursday, February 22, 2018 | 22.2.18

■ Wider-than-expected loss in 4Q17 partly due to cost overrun for several projects’ variation orders

■ Slashed FY18/19 forecasts by 54-58% to reflect operating loss at current activity level; earnings improvement slipping into 2H18

■ Declared 1 Sct final dividend

■ Potential price pullback offers healthier entry point; TP adjusted to S$2.90

Maintain BUY; TP reduced to S$ 2.90 after earnings revisions, still based on higher 2.4x FY18 P/BV multiple (0.5SD below mean). We continue to like SMM as a key proxy to the recovery in the O&G and O&M sectors, with strong order wins as key re-rating catalyst. Though, in the near term, we reckon that sentiment might be adversely affected by the wider-than-expected losses in 4Q17; and the M&A premium, which we estimated to be ~40 Sct. This could be given back if privatisation rumour is off the table..

Where we differ: more bullish on SMM’s contract wins. Order wins, a critical leading indicator for earnings recovery, is set to rise in the next 12 months.

We believe SMM’s strong order pipeline would translate into S$3bn in new orders in 2018, which could potentially include

1) a semi-submersible production unit for Shell’s Vito at S$400-800m;

2) Newbuild FPSO for Energean’s Karish-Tanin project at S$500m;

3) two large Compressed Gas Liquid carriers for SeaOne Caribbean valued at S$800m in total;

4) a Gravifloat (SMM’s proprietary technology) modularised LNG exporting terminal for Poly-GCL at c.S$1bn.

Reactivation of Sete Brasil rig orders. The landmark deal to sell all nine terminated jackup rigs to Borr Drilling and the disposal of harsh environment semisubmersible rig West Rigel have eliminated the key overhanging concerns on SMM. The restructuring of customer Sete Brasil is also seemingly closer to a resolution, pending approval of the revised restructuring proposal submitted at end-Aug 2017. We believe Singapore rigbuilders are well-positioned to deliver at least 4-5 rigs each (which are in the advance stages of construction) out of Sete Brasil’s existing 13 orders (c.S$1bn each). The reactivation of rig construction will be another re-rating catalyst.

Technical Analysis
Daily Chart
Our target price of S$ 2.90 is based on 2.4x FY18 P/BV, pegged to 0.5SD below its mean valuation since 2004. SMM’s book value has already been written down after the massive S$609m provisions taken in FY15.

Key Risks to Our View:
Key downside risks are sustained low oil prices which would affect rig count and newbuilding activities, execution risks in new product types, and corruption allegations in Brazil that, if found guilty, could lead to financial and reputational loss. Upside risk could come from privatisation or M&A activities, as well as the write-back of provisions from successful deliveries or vessel sales. (Read Report)

Source : DBS Group Research

Posted on Thursday, February 22, 2018 | 22.2.18
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