• Sembcorp Marine (SGX:S51) released a brief 1Q20 operations update. Other than repairs and upgrades, all segments were hit by the COVID-19 outbreak and low oil prices.
• We cut EPS by 37% to 465% for FY20F-22F to reflect the much weaker environment. Our Target Price is reduced to S$0.80, now based on 0.8x CY20F P/BV.
• Sembcorp Marine is trading at new trough of 0.7x CY20F P/BV. Our HOLD call is premised on the potential restructuring among the Sembcorp (SGX:U96)/Keppel Corp (SGX:BN4).

Except for Ship Repair, All Segments Hit by COVID-19 Outbreak

• Yard activities have been severely constrained by the reduced workforce. Sembcorp Marine’s operating yard workforce of about 20,000 persons was substantially reduced to 850 persons since the movement restriction measures were implemented beginning 21 Apr by the Singapore government.
• Other than ship repair, all segments were hit by delays/deferral of execution. There were also no orders announced in 1Q20, resulting in lower revenue recognition and losses during the quarter.

Lower Oil Price Deferred Capex

• The current low and volatile oil price levels have also prompted major oil companies to defer their final investment decisions (FIDs) for projects and cut their capex significantly for 2020. Ongoing negotiations and finalisation of new orders have been deferred, including the FID for the Siccar Point Cambo FPSO project, which has been postponed to 2021.
• Sembcorp Marine expects its ability to secure new orders for the foreseeable future to be affected. We cut our orders to S$300m, similar to 2016’s order win of S$320m.

SMM Expects Previous Trend of Losses to Continue

• Sembcorp Marine guided that, except for the repairs and upgrades segment, business activity levels remained low for all other segments. Overall business volumes for all segments are expected to further weaken for the rest of the year.
• Supply chain disruptions as a result of COVID-19 will impact the timeline of project execution. The outbreak and low oil prices will adversely affect new orders and Sembcorp Marine expects the previous trend of losses to continue in the foreseeable quarters.

Maintain HOLD But Target Price Lowered to S$0.80

• Key positives: the group generated positive operating cashflows and will take steps to defer non-essential capex to preserve cashflow. We believe net gearing remained at 1.9x. Sembcorp Marine also said that the group is in discussion with lenders to refinance loans, which caused net finance costs to rise.
• We cut our EPS by 37% to 465% for FY20-22F to factor in lower orders, higher finance costs and weaker operating leverage.
• There are no real catalysts in the near term but our HOLD call is premised on hopes of restructuring within the Sembcorp (SGX:U96)/Keppel Corp (SGX:BN4) group.
• Our Target Price is reduced to S$0.80, now based on 0.8x P/BV (previously 1x P/BV), reflecting the challenging outlook.

Source: CGS-CIMB Research - 13 May 2020