• 1Q net profit 8% of full year cons.
• P/B not justified by ROE
• Only large cap O&G pure play

1Q Net Profit Was 8% of Cons. FY18 Estimate

Sembcorp Marine (SMM) reported a 58.3% YoY rise in revenue to S$1.18b but saw an 85.7% fall in net profit to S$5.3m in 1Q18. Results were significantly below ours and the street’s expectations, with 1Q net profit accounting for 7% and 8% of ours and the street’s full year estimate, respectively. Based on current secured orders, work volume for the foreseeable quarters is expected to remain low, and management stated that the trend of negative operating profit may continue.

Is Current P/B Fair Based on Forecasted ROE?

Post the release of FY17 results in Feb, analysts have lowered their earnings forecasts, and consensus estimates of forward ROE are now 2.3% for FY18 and 3.7% in FY19 respectively. There is a risk that these may be further lowered after the release of 1Q results yesterday.

The stock is currently trading at around 1.9x P/B, and the last two times this happened were in early 2015 and Apr 09 when ROE was between 20-30%. For ROE to return to 20%, we estimate net profit has to revert to at least S$500m, which is unlikely even if we were to assume new orders of S$5b this year, as time is required for revenue to be booked for a unit under construction.

Market Likely Ascribing a Premium Due to Scarcity Value

Despite the above, SMM is the only large cap oil and gas pure play in the Singapore space and hence a likely favourite for investors wishing to gain exposure to rising oil prices. Its share price has been sensitive to oil price movements but at current price levels we think most of the positives have been priced in – we are expecting new orders of S$3b this year and next, which we believe is similar to consensus. Even with estimates of S$4b or more, this still does not justify higher P/B valuations as explained above.

Based on 1.75x FY18/19F book value, we derive a fair value estimate of S$2.10 on the stock.

Source: OCBC Research - 26 Apr 2018