• No impairments in 4Q16
• Oil price recovering
• Expecting Gravifloat-related orders

Bucking the impairment trend – none in 4Q16

Sembcorp Marine (SMM) reported a 37.5% YoY drop in revenue to S$829.9m and a net profit of S$78.8m in FY16 vs. our full year forecast of S$80.4m. Excluding non-operating items, net profit was even higher at S$97.7m. Unlike most other companies in the sector, SMM did not see any asset impairments in 4Q16. Recall that Keppel Corp saw significant impairments in 4Q16 with the right-sizing of its global network of yards, while SMM will be returning two yards (Shipyard Road yard and Tuas Road yard) after the Pulau Samulun yard was returned to the Singapore government last year. Meanwhile phase 2 of the new Tuas Boulevard yard was recently completed in Jan this year.

Less pressure on balance sheet

SMM’s net gearing has increased from 1.0x in FY15 to 1.1x in FY16, largely due to investments of S$227m in key technology companies and remaining shares in PPL Shipyard. With proceeds from the sale of the COSCO stake, SMM’s net gearing should go below 1x; resolution of deferred jack-ups (sale to other parties) would also bring in more cash. Maintenance capex for 2017 is expected to be lower than S$50m, while most of the new Tuas yard capex has been spent.

Expecting new orders with new tech enabler; things are on the mend

With OPEC’s resolve to support oil prices and a stabilization in the oil market, sentiment continues to improve, and the likelihood of impairments has gone down significantly. Though the return of drilling orders will still take some time, SMM is hopeful of securing new orders relating to Gravifloat, which enables it to offer a suite of near-shore redeployable, modularized solutions that can be built off-site. Indeed, SMM is currently in multiple discussions with different customers.

Given the chunky contracts that can be secured (along with other non-drilling solutions), we believe that our new order win forecast of S$1.5b for FY17 is a reasonable figure. Meanwhile, excluding the Sete drillships, SMM’s net order book stood at S$4.7b in FY16.

Taking into account all the points above, we increase our valuation to 1.4x FY17F book (still below 1 s.d. of historical mean since 2003), and our fair value estimate rises from S$1.43 to S$1.76.

Upgrade to BUY. In line with our expectations, SMM has declared a final cash dividend of 1.0 S cent/share, following an interim dividend of 1.5 S cents/share.

Source: OCBC Research - 23 Feb 2017