Simons Trading Research

Author: simonsg   |   Latest post: Mon, 6 Jun 2022, 4:02 PM


Sembcorp Marine - Shortage of Workers Woes

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  • Shortage of workers led to provision for labour cost (S$361m) for Sembcorp Marine; gross loss of S$588m and net loss of S$647m in 1H21. This should ease in 2H21.
  • Order book at S$1.78bn, which gives less than two years of earnings visibility. Combining Keppel Offshore & Marine (KEP O&M) could bring order book to S$7.48bn.
  • Our HOLD call on Sembcorp Marine (lower target price of S$0.09 on 0.7x CY21F P/BV) is premised on Temasek’s support and the potential combined entity with Keppel O&M.

Gross Loss Could Persist Till 2023F Without Keppel O&M

  • Sembcorp Marine (SGX:S51)’s 1H21 net loss of S$647m (1H20: net loss S$192m) was 10% wider than consensus and our forecasts, on a decent y-o-y 7% decline and +40% h-o-h in revenue (to S$844m). It took in S$472m of after-tax provisions, broken down into
    1. S$361m additional labour costs;
    2. S$65m of provisions for yards’ reinstatement and
    3. S$46m for asset impairment losses.
  • Ex-provisions, Sembcorp Marine would have recorded S$175.2m.
  • Quantum of 1H21 losses were previously guided to be wider than FY20, and we expect investors to still be disappointed. FY21-23F earnings per share forecast cut by 10-239% to account for higher COS and expect gross loss to persist till FY23F.

Shortage of 4,000 Workers

  • Attrition from COVID-19 (e.g. less South Asian workers) resulted in Sembcorp Marine seeking alternative sources. Sembcorp Marine requires at least 19,000 workers to operate at full capacity. With about 15,000 workers currently, Sembcorp Marine has to turn to skilled workers from countries such as China and Malaysia (doubles that of traditional sources) insufficient revenues to cover fixed overheads.

Sort Out Existing Orders First Before Getting New Contracts

  • Sembcorp Marine secured S$615m of new orders in 1H21 (we expect S$1bn for FY21F). Net order book stood at S$1.78bn (1Q21: S$1.89bn) with most of the projects being delayed by at least 12 months. About 34% of Sembcorp Marine’s net order book relates to green energy solutions.
  • There have been no cancellations for existing projects, but project rescheduling remains a priority ahead of getting new contracts. In 1H21, Sembcorp Marine has 16 projects under execution, five of which are scheduled for delivery in FY21, and nine in FY22.

In Need of Rights Issuance

  • Sembcorp Marine's free cash flow was –S$24m in debt servicing and to secure new orders.
  • Key risks: more impairment of assets (Brazilian and Singapore yards), cost overrun.
  • Reiterate HOLD call on Sembcorp Marine. Our target price of S$0.09 for Sembcorp Marine is adjusted for rights issuance.

Source: CGS-CIMB Research - 30 Jul 2021

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