• We were right to expect a loss of S$20m-40m for 2Q18 as Sembcorp Marine posted loss of S$55.6m. This included S$27m of one-off loss for the completion of West Rigel sale.
• 1H18 reported loss of S$50m was more than the S$42m we expected for FY18F.
• EBIT losses narrowed sequentially to S$29m in 2Q18 from S$45m in 4Q17.
• Key takeaway from briefing: Shell Vito project’s margin could be as good as repair/conversion (c.15%) as equipment are supplied by the owners. Management also appeared to be confident of order pipeline although competition remains stiff. 
• Maintain ADD and Target Price of S$2.52. Order win is key catalyst.

Longer Time Required to Prepare for EPC Project Recognition

Understandably, the lack of volume and scale dented Sembcorp Marine's margin as it took a longer time to recognise revenue for engineering, procurement and construction (EPC) projects which require detailed engineering and construction planning. Excluding West Rigel, 2Q18 net loss of S$29m was in line with our expectations. 

2Q18 revenue rose 38% q-o-q to S$1.6bn due to stronger job flow in rigs/ floaters and repair/ upgrades.

Sequential Narrowing of EBIT Losses

EBIT margin losses narrowed from -6.7% in 4Q17 to -3.7% in 1Q18 and -1.6% in 2Q18. This was due to improvement in work volume amidst a leaner cost environment. 

While management has guided for operating margin to be negative in FY18, and improve to positive in FY19, we believe recognition of Karish floating production storage and offloading (FPSO), a sizeable order (S$476m), and high-margin Shell Vito floating production unit (FSU) could lift op margin by 4Q18. We see EBIT margin of 0.4%.5% in FY18F/ FY19F.

Keeping Our S$2bn Order Forecast

Management appeared to be confident of its order pipeline and some good news ‘soon’. Notable projects in the pipeline include Rosebank FPSO (c.US$1bn), SeaOne two compressed liquid natural gas carriers (c.US$600m) and Gravifloat (US$1bn). 

YTD, Sembcorp Marine has secured S$730m of orders or 37% of our S$2bn order forecast for FY18F.

Stronger Ship Repair

Revenue from ship repair grew 59% q-o-q to S$126m in 2Q18. 

Sembcorp Marine repaired/ upgraded a total of 158 ships in 1H18, with higher average revenue per vessel of S$1.2m vs. S$1m in FY17. Management expects to see some uptick of repair in 2H18 with more LNG vessels and ballast water treatment system and gas scrubber jobs.

Managing Liquidity

Net gearing declined to 1.26x in 2Q18 vs. 1.13x in 1Q18. 

Sembcorp Marine received US$123m from the sale of West Rigel semisubs in 2Q18, with more progressive receipt to be collected in 2H18 and 2019. Including West Rigel, Sembcorp Marine has fully monetised the inventory of 10 risky rigs. Balance sheet should gradually improve by 1Q19F with the remaining US$1bn to be collected as these rigs are delivered. 

Sembcorp Marine has delivered five out of nine Borr Drilling rigs since 4Q17. Three more units will be delivered in 2H18F and another in 1Q19F.

Maintain ADD and Target Price of S$2.52

Our FY18F EPS is cut 15% to include the loss from West Rigel sale. Our Target Price is still based on 2.2x P/BV CY18F P/BV, its 5-year average. 

To stay relevant, Sembcorp Marine is transforming itself to take on large scale EPC projects and offering nimble compacting solutions to customers. It is also scouting for new technology/intellectual property to widen its service offering, preparing for the rig recovery. The latest acquisition of Sevan Marine cylindrical rigs is a case in point. 

Key risks include a cash call to fund sizeable EPC projects.

Source: CGS-CIMB Research - 20 Jul 2018