• 1Q17 boosted by disposal
• But impacted by variation order
• More enquiries in past two months

1Q17 Results Boosted by COSCO Disposal

Sembcorp Marine (SMM) reported a 17.2% YoY drop in revenue to S$760.1m and a 27.9% fall in net profit to S$39.5m in 1Q17, such that the latter accounted for 34% of our full year estimate. However, this was boosted by a S$46.8m gain from the divestment of SMM’s 30% interest in COSCO Shipyard Group, which was completed in Jan 2017. Excluding this, we estimate that the group would have seen a net loss before tax of about S$10m.

EBIT margin was low at 1.8% in the quarter, impacted by costs incurred for a floater project (undisclosed) which is pending finalization with the customer, likely in 2Q17. Management does not expect further costs to be incurred in subsequent quarters from this variation order.

Continues Right-sizing Operations

SMM continues to right-size its operations by returning yards to the government. The Tanjong Kling yard will also be returned ahead of its lease expiry date. There was a reduction of about 500 in its workforce in 1Q17, including employees and subcontractors. Since 2015, the reduction in total workforce has been about 9,000.

Enquiries Gained Momentum in Past Two Months

In 1Q17, SMM had new orders of S$75m (all variation orders). New order enquiries relating to non-drilling solutions have increased over the past two months, and there have been “active engagements with potential customers in recent months for potential projects”. SMM has also made further progress in the development of its near-shore gas infrastructure solutions using its Gravifloat technologies; the group is in “active discussions with several potential customers” and remains hopeful of new orders in 2017 for this new business segment.

Meanwhile, SMM’s net order book stands at S$7.14b; excluding the Sete Brasil drillships, it is about S$4.02b. With better visibility of new order flow (details behind) relating to Gravifloat, we increase our valuation from 1.4x to 1.6x FY17F book (still lower than the -1s.d of 1.95x since 2003), and our fair value estimate rises from S$1.76 to S$2.01. Maintain BUY.

Source: OCBC Research - 28 Apr 2017