• In view of a slower-than-expected pace of orders, we take a more realistic stance and cut both Keppel Corp and Sembcorp Marine orders to S$2bn for 2018F (from S$3bn). As such, our earnings forecasts for Sembcorp Marine is cut by 1-12% for FY18-20F. 
• Our Target Price remains unchanged at S$2.52, still based on 2.2x CY18F P/BV, its 5-year average.
• Potential re-rating catalysts include stronger-than-expected orders while downside risks are cost overruns on projects.

Guidance of Negative EBIT Margin Could Come Into Play

Recall that 1Q18 EBIT margin was 1.7% with the effects of SFRS adoption. Excluding that, EBIT margin was -3.7% due to provision of cost overrun. Assuming cost overrun is contained with no positive adjustment for variation orders, Sembcorp Marine (SMM)’s EBIT margin could range from -1% to -3%. 

Management had guided for a trend of negative operating margin depending on the timing of when sizeable orders are executed. We estimate 2Q18F net loss to be in the range of S$20m-40m. Our EBIT margin assumptions for FY18-20F remain at 2%, 5% and 6%. 

We believe the execution of contracts secured in 2H17-1H18 could only start to contribute meaningfully in 2H18F. There could also be room for provision write-backs upon settlement of variation orders by end-2018F, including the Libra floating production storage and offloading (FPSO) vessel.

Order Win Momentum Slower-than-expected

YTD order win has been lacklustre at S$900m, comprising mainly FPSO topsides and living quarters (c.S$476m for Technip FMC and S$400m for Shell Vito). We believe Sembcorp Marine is still in the running to clinch the US$1bn Gravifloat order from Chinese GCL-Poly.

We estimate 2Q18F ending order book will remain steady q-o-q at about S$4.6bn. Our order expectations for 2019-2020F remain unchanged at S$3bn p.a.

Maintain ADD and Target Price of S$2.52

Our EPS is cut by 1-12% for FY18-20F to reflect a lower order assumption for 2018F. We think Sembcorp Marine’s losses may not shock the market anymore but the focus will be on how fast it can clinch sizeable orders to improve its yards’ utilisation and operating leverage. It is trading at 1.7x CY18F P/BV, or -0.5 s.d. of 5-year mean.

Key potential re-rating catalysts include stronger-than-expected orders and surge in oil prices. Downside risks could come from cost overrun in executing large-scale orders.

Source: CGS-CIMB Research - 10 Jul 2018