Sembcorp Marine

Sembcorp Marine (S$1.96): Surrendered 4Q15 to significant provisions

Sembcorp Marine (SMM) issued a profit warning that it expects to record a net loss in 4Q15 and a significant earnings drop for FY15, when the rig builder releases its results on 15 Feb 2016.

This is worrisome as it is only mid-way through 4Q15 and already the group is cautioning that its bottom line will be hit by persistently challenging market environment, and customers deferring or seeking to defer rig orders.

Separately, SMM also revealed that it has taken legal action against Marco Polo Marine (MPM) in the Singapore High Court on 1 Dec for failure to pay a second disbursement of US$21.4m in its disputed jack-up rig contract.

In light of these developments, Maybank-KE estimates that SMM may have to set aside $70m in the 4Q15 to provide for:
1) Legal cost and losses
2) Possible 10% down payment refund to MPM
3) Impairment losses for the jack-up rig

The house also postulates the rig builder will leverage on this opportunity to kitchen sink more losses into this quarter, and thereby slashes its 4Q15 net profit forecast of $99m to a net loss of $12.6m.

Consequently, Maybank-KE also cuts its FY16 earnings by 6% based on more delivery deferrals and now assumes that no dividend will be paid out in 2015.

The house maintained its Sell rating with an unchanged TP of $1.75, but perhaps some upside risk from potential privatisation of SMM by parent Sembcorp Industries.

Sembcorp Marine is currently trading at 11.8x forward consensus P/E.

Latest broker ratings:
UOB Kay Hian downgrades to Sell, cut TP to $1.72 from $2.34
Maybank-KE maintains Sell with a TP of $1.75
CLSA maintains Sell with a TP of $1.77
CIMB maintains Reduce but cuts TP to $1.88 from $2.03
OCBC maintains Sell with a TP of $2.00 (pending downward revision)