• Bidding for work
• But competition is intense
• Undemanding valuations but risks remain

Share Price Correction Since 1Q19 Results

Since our last report on 6 May 2019, Sembcorp Marine’s (SMM) share price has corrected by 13.2% compared to the STI’s 6.8%. Recall that the group had reported net profit of S$1.7m for 1Q19, impacted by a low baseload of work and the accelerated depreciation related to the Tanjong Kling yard. Excluding non-recurring items, net operating profit for 1Q19 was S$12m, compared with net operating profit of S$23m for 4Q18.

As at 1Q19, new contracts secured amounted to S$175m, while net order book as at 1Q19 stood at S$2.6b (excluding Sete drillship contracts). This represents just about half of total revenue in FY18. Despite the slow 1Q, management continues to believe that new orders should flow through this year. To recap, SMM won new orders of S$1.18b in FY18 and S$750m in FY17.

Competing for Work

The offshore industry is improving, though competition for projects remains intense. According to Upstream (16 May), at least five leading offshore contractors are competing for the front-end engineering and design (FEED) work linked to Posco Daewoo’s third-phase development of the Shwe gas project off Myanmar.

Bids for the FEED contest (of which results are likely to be finalized within months), would eventually lead to an EPC contract. The five that are contending for the FEED work are McDermott, SMM, Daewoo Shipbuilding & Marine Engineering, Hyundai Heavy Industries and Samsung Heavy Industries.

Undemanding Valuations But Risks Remain

SMM’s stock is currently trading at 1.30x forward P/B, lower than its mean of 1.40x in the past three years but higher than the -1 s.d. level of 1.18x. Besides the soft set of results, the price action could be due to the recent market selldown amidst increasing uncertainties which have affected sentiment, as well as the slide in crude oil prices.

We correspondingly lower our P/B valuation from 1.60x to 1.45x, and our fair value estimate slips to S$1.60. Maintain HOLD.

Risks include 1) higher than expected capex requirements and potentially a need to raise funds, 2) risks relating to Brazil, and 3) lower than expected new order flows.

Source: OCBC Research - 30 May 2019