Sembcorp Marine

Sembcorp Marine: (S$2.46) Abysmal 3Q15 hard hit by rig deferments, impairment and associate losses
Sembcorp Marine (SMM) posted 3Q15 results that were far below already lowered expectations as net profit slumped 75.7% y/y to $32.1m. This took 9M15 earnings to $247.2m (-36%) forming just 54% of the street’s full year forecast, triggering a wave of broker downgrades.

Top line performance was poor with 3Q15 revenue sliding 34% to $1.1b as the group got hit by double whammies from its rigs (-43.4% to $943.8m) and repair (-16.5% to $131.4m) businesses, mitigated by contributions from offshore platforms (+6.6% to $234.7m).

The tumble in its rig business was mainly due to the suspension of revenue recognition for five jackup rigs from Aug ‘15 due to customer deferment requests.

Operating margin whittled 3.4 ppt to 6.6% due to reduced operating leverage, coupled with consultant fees for yard transformation and a rebranding as well as a reversal of some previous profits that were recognised.

The group’s bottom line was further pressured by associate and JV losses of $24.4m (3Q14: $2.6m profit) as well as a $17.1m impairment charge. Both were associated with its investment in Cosco Shipyard Group.

During the quarter, the group secured a US$1b EPC contract with Maersk Oil North Sea UK, bringing ytd order wins to $2.9b or ~70% of the $4.2b it won in 9M14. As a result, its order book slipped 8.1% to $11.6b with deliveries and completion stretching until 2020.

Management updated that its Brazilian exposure through seven drillship orders have continued to hamper its finances with operating cash flows contributing a measly $0.2m to its depleted cash hoard of $824.8m (-47%).

Moving forward, management continues to see weak oil prices and an oversupply of rigs weighing on overall sentiments.

At current prices, SMM is trading at 12x forward P/E and 1.7x P/B.

Latest broker updates:
Maybank-KE maintains Sell, cuts TP to $1.75 from $2.00
Deutsche maintains Sell, cuts TP to $1.90 from $2.00
OCBC downgrades to Sell from Hold, cuts TP to $2.00 from $2.20
CIMB maintains Reduce, cuts TP to $2.03 from $2.18
UOBKH maintains Hold, cuts TP to $2.34 from $2.45
Credit Suisse maintains Neutral, cuts TP to $2.40 from $2.60
HSBC maintains Buy, cuts TP to $3.23 from $3.57