• Sembcorp Marine could start to deliver positive EBIT from FY19F with complex legacy projects gradually delivered.
• The current order book of S$3.1bn mainly comprises expected profitable FPSO/FPU jobs secured since 2017 and two units of Transocean drillships.
• Net gearing at 1.31x post YTD collections. Securitisation of Borr Drilling receivables (c.S$1bn) could reduce net gearing to 1x.
• Maintain ADD.

4Q18 Outperformance

• SEMBCORP MARINE LTD (SGX:S51)'s 4Q18 net profit of S$5.9m beat our expectation of S$24m losses.
• Reported net loss for FY18 was S$74m vs. our forecast of S$104m and consensus (S$98m). There were no further provisions for Sete Brasil rigs. Net profit would have been higher at S$23m if we exclude S$12m accelerated depreciation and impairment of chartering vessel of S$4.7m.
• The beat was also helped by +S$6m of finance income q-o-q and +S$6m of tax credit q-o-q. The earlier move from Tanjung Kling yard to the new Tuas Boulevard Yard will result in S$60m of accelerated depreciation to be recognised over five quarters from 4Q18. This could lead to annual cost savings of S$15m from FY20F.
• No dividend was proposed.

Profitable at the EBIT Level, Guidance Turned More Positive

• Against its previous guidance of ‘negative operating leverage’ for 4Q18, Sembcorp Marine turned in S$2m EBIT profit. EBIT margin was 0.2% vs. 3Q18’s -1.8% due to the net effect of no major provisions for contract losses and some write-back of costs.
• Management’s guidance turned more positive to “stable operating leverage” (read: profitable EBIT).
• We believe the completion of complicated projects such as the FSO Alisa for the Culzean field in the UK North Sea sector and substantial completion of Hereema offshore crane vessel (due for delivery in 1H19) could alleviate cost pressure.
• Current order book of S$3.1bn comprises less complicated and profitable (3-4% EBIT margin) jobs such as Petrobras FPSOs, Transocean drillships, FPSO/FPUs for Technip FMP/Statoil and Shell.

Securitisation of Borr Drilling Will Help Reduce Gearing

• Net gearing inched up to 1.44x as at end-4Q18 (3Q18: 1.4x) due to working capital needs. YTD, Sembcorp Marine has received S$320m from Saipem and Transocean for the West Rigel semi-subs, reducing net gearing to 1.31x.
• Sembcorp Marine has delivered all of the nine jack-up rigs to Borr Drilling and reclassed the receivables to long-term assets (c.S$1.1bn). Sembcorp Marine is open to securitise the Borr receivables. Assuming 100% securitisation, net gearing would improve to 1x. We think there is no pressing need for a rights issue given the lack of sizeable orders (Gravifloat and Rosebank still in the pipeline).

Cut Order Forecasts; Maintain ADD But Lower Target Price to S$2.21

• Order wins of S$1.2bn in 2018 lagged our expected S$1.5bn. We temper our 2019-20F order target to S$2bn-2.5bn (previously S$3.5bn p.a.). EPS is cut by 2-21% for FY19-20F on lower orders and higher depreciation.
• We roll forward our Target Price to CY19 P/BV, pegged to 2x, or 10% below its 5-year average (previously 2.2x).

Ship Repair Improving Gradually

• Ship repair revenue improved 7% q-o-q to S$140m with average value per vessel surging to S$2.12m. FY18 average revenue per vessel improved to S$1.6m (FY17: S$1.28m). The trend is likely to grow with more retrofitting of ballast water management systems (BWMS) projects in 2019, backed by S$160m of such orders secured in FY18.
• We forecast a conservative y-o-y growth of 7% for ship repair revenue to S$509m in FY19 though we see potential for further upside.

Capex to be Lower in FY19, We Expect S$200m

• Total capex for FY18 was S$343m, higher than our expectation of S$200m which included costs to move some operations to the new yard. There were also new capabilities that were invested for future contracts. We believe some of them could be due to the expansion of LNG solutions.
• Going into FY19, Sembcorp Marine expects capex to be lower than FY18 and we forecast S$200m. This includes guided maintenance capex of S$50m-70m.

Key Catalysts and Risks

• Catalysts include consecutive positive EBIT and stronger orders while risks include cost overrun, sudden plunge in oil price and unexpected equity issuance.

Source: CGS-CIMB Research - 20 Feb 2019