Simons Trading Research

Author: simonsg   |   Latest post: Thu, 14 Nov 2019, 5:02 PM


Sembcorp Marine - Secures New Contracts But Not at a Turning Point Yet

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  • While the S$400m worth of new contracts announced on 2 Sep 19 is positive in the medium term, we believe this does not presage a turning point in new-order flows for the industry.
  • In the short term, Sembcorp Marine’s earnings will be impacted by poor order flows. We downgrade our earnings estimates and lower our target price to S$1.22.
  • Maintain HOLD. Entry price: S$1.10.

What’s New

New contracts announced.

  • SEMBCORP MARINE (SGX:S51) announced S$400m of new contracts in various industries. These include:
    1. an FPSO conversion project for Shapoorji Pallonji and Bumi Armada;
    2. three gas-related FSRU and FSU conversion projects for Mitsui/Karpower, Gasfin Development and BW LNG;
    3. a makeover of Japan's largest cruise ship for NYK Cruises; and
    4. fabrication of 15 jackets for an offshore Taiwan wind farm.
  • While Sembcorp Marine did not provide a breakdown for the $400m worth of contracts, we estimate that at least 80% of this relates to the FPSO, FSRU and FSU conversion projects.
  • Year-to-date new orders total S$575m vs our full-year estimate of S$1.0b. We forecast S$1.2b in new orders for 2020.

Stock Impact

Positive in the medium term but 2H19 will be difficult, in our view.

  • It is positive that the company has added to its orderbook in the medium term and importantly, Sembcorp Marine appears to be able to clinch projects in quite a varied number of sectors - cruise lines and wind power, apart from its bread-and-butter oil & gas projects. However, 2H19 will be a difficult period, impacted by poor new-order flow from 2H18 to 1H19.
  • Sembcorp Marine commented that today’s project-win announcement will not have a material impact on 2019 earnings. See Sembcorp Marine's announcements.

Globally, the rig market has improved.

  • Globally, the rig market has improved, with both semi-submersible and jack-up rigs seeing slight y-o-y increases in utilisation rates. However, we note there are only nine semi-sub newbuilds in the pipeline (7% of total global semi-sub fleet) vs jack-ups which have 61 newbuilds (12% of global fleet).
  • In addition, Westwood Global Energy has estimated there are around 32 rigs in the Asia-Pacific region that are warm stacked, potentially adding to a market that is already oversupplied.

Earnings Revision / Risk

  • We increase our net loss estimate for 2019 to S$47m (from -S$18m) and slash our net profit estimates for 2020-21 by 46% and 71% respectively. The company has stated that losses for 2019 are “projected to be similar in range to last year’s losses”.

Valuation / Recommendation

Maintain HOLD but lower our DCF-based target price by 7.5% to S$1.22.

  • At our fair value, the company would trade at 1.1x 2020F P/B. While the company’s one-year forward P/B valuation is already 1SD below its 10-year average of 2.7x and near its historical low of 1.0x, we believe the ongoing Brazilian-corruption investigation will continue to remain an overhang on its share price.
  • Entry price is S$1.10.

Share Price Catalyst

  • Further strength in new-order wins for the O&M segment, particularly for production and LNG-powered and LNG-related assets.
  • Resolution of its Brazilian corruption enquiry. A settlement of the corruption enquiry material overhang on the stock.

Source: UOB Kay Hian Research - 3 Sep 2019

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