• Net loss in 2Q18
• Negative op profit till end FY18
• No interim div for 1H18

Net Loss of S$55.6m in 2Q18

Sembcorp Marine (SMM) reported a 150.8% YoY rise in revenue to S$1.63b but saw a net loss of S$55.6m in 2Q18, below ours and the street’s expectations. For 1H18, the group had a net loss of S$50.3m, but we note that this was partly due to a S$27m loss recognised from the sale of West Rigel.

Revenue was significantly higher in 2Q18 due to recognition on delivery of four jackup rigs to Borr Drilling and one to BOTL, sale of West Rigel and higher percentage recognition for other ongoing projects. Excluding the five jackups and West Rigel, revenue would have been S$1.1b, a decrease of 24% compared with 1H17.

Negative Operating Profit to Persist Till End FY18

Overall business volume has remained low, resulting in operating losses of S$45m for 4Q17, S$33m for 1Q18 and S$29m for 2Q18. Work volume for the foreseeable quarters, while improving, is expected to remain low, and the trend of negative operating profit will continue for the current financial year before improving thereafter.

Change in Business Mix; More Time Before Significant Revenue Recognition

The majority of new orders so far have been for offshore production projects. This trend is expected to continue and SMM is responding to an “encouraging pipeline of enquiries and tenders for innovative engineering solutions”.

Looking ahead, while improvement in E&P capex is projected to continue, management mentioned that it will “take some time” before there is a sustained recovery in new orders. The group’s transformation efforts to move up the value chain has resulted in new business opportunities but they require significant time and effort in project co-development with potential customers before orders are secured.

Such new-build EPC projects have detailed engineering and construction planning phase, which may take as long as six to 12 months before main construction activities and corresponding revenue recognition can take place.

Margins also remain compressed with intense competition. No interim dividend was declared for 1H18. We maintain our S$2.10 fair value estimate on SMM.

Source: OCBC Research - 23 Jul 2018