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Author: simonsg   |   Latest post: Thu, 14 Nov 2019, 4:47 PM

 

Sembcorp Marine - 4Q18 Turnaround Surprise; We Remain Cautious on Balance Sheet

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  • Sembcorp Marine reported a surprise net profit of S$5.9m. Results beat our and consensus expectations of a loss.
  • The turnaround was driven by key offshore engineering division, which reported a S$34m operating profit on lower revenue of S$703m (-9% q-o-q).
  • Net gearing remained elevated and we remain cautious to chase the rally on balance sheet concerns. We revised up our earnings forecasts significantly.
  • Pending a full review, maintain HOLD and target price of S$1.83. Entry price: S$1.65.

4q18 Results

Surprise profit for 4Q18.

  • SEMBCORP MARINE LTD (SGX:S51) surprised with a headline 4Q18 net profit of S$5.9m, vs our and consensus expectations for a loss. The surprise profit was driven by a turnaround in the core offshore engineering business, boosted by higher interest income and a S$10m tax write-back.
  • One-offs for the period included S$4.7m impairment for a marine vessel, S$12m in accelerated depreciation as well as an above-average tax write-back of S$10m.
  • Conservatively, core net profit for 4Q18 was S$11.4m, a sizeable reversal from the core loss of S$30.3m in 3Q18.

Lower quarterly revenue but higher profit.

  • 4Q18 revenue was S$913m (+39% y-o-y, - 22% q-o-q) and included S$211m from the delivery of Borr drilling rig, Natt. Excluding this and the impact from the termination of three rig contracts in 4Q17, revenue was S$702m (+30% y-o-y, -9% q-o-q).
  • Despite the sequential decline in revenue, group operating profit was higher at S$2.1m (4Q17: S$52m loss, 3Q18: S$21m loss).

New orders driving higher operating margin.

  • The core offshore engineering business reported an operating profit of S$33.9m, implying operating margin of 3.7% (4Q17: -60%, 3Q18: -3.9%). This surprised turnaround was reported to be driven by:
    1. project mix, with greater contributions from new orders; and
    2. better absorption of overheads from higher work volumes.

66 ship repairs in 4Q18.

  • Sembcorp Marine made 66 ship repairs (4Q17: 62, 3Q18: 72) during the quarter, with average repair revenue of S$2.1m per vessel, the highest since 2014. This arose from a greater amount of higher-value work.
  • For 2018, Sembcorp Marine repaired 41 LNG vessels and 10 cruise vessels.

Ship chartering: Operating loss of S$11.8m.

  • The loss included a provision made for the Aquarius Brasil, which we understand partly relates to the S$4.7m impairment made for a marine vessel. The accommodation vessel came off its charter in 4Q18.
  • Sembcorp Marine is confident on the chartering outlook in Brazil, citing strong activity driven by Petrobras.

Finance income rose to S$20.9m.

  • The S$20.9m ( + > 100% y-o-y, +41% q-o-q) was higher than our expectation of S$16m. Finance income is expected to rise again in 1Q19 on delivery of the last rig to Borr, and we expect it to remain steady from 2Q19 onwards.

Net gearing rose further to 1.44x

  • Net gearing rose further to 1.44x (4Q17: 1.13x, 3Q18: 1.37x) on the back of higher net borrowings.
  • Sembcorp Marine has about S$1.2b in deferred payment to be collected over the next five years, implying that an organic de-leveraging to < 1x net gearing will be protracted.

Capex to remain elevated in 2019.

  • Capex in 2018 was S$343m, and is expected to be lower in 2019, if but slightly. Maintenance capex was guided at S$50m-70m per year.

No dividend for 2018.

  • This was against our expectations of a 1 S cent dividend.

Stock Impact

Earnings picked up but concerns on balance sheet renewed.

  • Sembcorp Marine’s share price has rallied on the earlier expected turnaround and could rally further given beaten-down valuations. Despite the brightening earnings outlook, we remain cautious due to the tight balance sheet against a backdrop of rising working capital requirements and elevated capex spend.
  • Critical to Sembcorp Marine’s profitability is the sustainability of new contract wins. A chicken-and-egg situation exists where Sembcorp Marine needs to secure a higher volume of new orders to grow profits, cash flow and de-lever. Yet, its elevated gearing may disadvantage it from winning orders necessary to achieve that outcome. De-leveraging is probably the ideal solution and it is uncertain what form this might take.
  • Sembcorp Marine is currently exploring the securitisation of receivables for its Borr rigs (~S$1b), which could massively help liquidity. While plausible, we are not certain if this is achievable commercially, given our concern regarding Borr.

Earnings Revision

Significantly upgrade earnings for 2019-21.

  • Given the earlier-than-expected turnaround, we have cautiously revised our earnings. This assumes S$1.5b-2.0b in contract wins annually over the period, and that Borr is able to sustain the interest income payments.
  • Our revised 2019-20 net profit forecasts are S$48m and S$50m respectively. 2021 net profit is introduced at S$53m.

Valuation / Recommendation

Maintain HOLD and target price of S$1.83.

  • Despite the surprise earnings turnaround, we are cautious to chase the rally. For reference, assuming we peg the same 1.7x 2019F P/B to our revised numbers, our target price would rise to S$1.92.
  • Pending a full review, we are keeping our target price unchanged at S$1.83. Entry price is S$1.65.

Source: UOB Kay Hian Research - 22 Feb 2019

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