Sembcorp Marine

Sembcorp Marine: (S$1.905) No end to woes after another rig hit by standstill agreement
Sembcorp Marine (SMM) has been hit with another delivery deferral after it announced a standstill agreement with North Atlantic Drilling (NAD) until Jun ‘16.

The US$568m rig was commissioned in Apr ‘12 and was originally slated to be delivered in 1Q15 for deployment in the North Sea and the Barents Sea, but the delivery has since been deferred.

As such, the rig is likely to be almost 100% completed and SMM would have recognized most of the profits. Assuming a EBIT margin of 10-12%, full provisioning for this rig could exceed $70m.

The standstill agreement allows NAD to continue looking for a drilling charter and gives SMM the right to seek out potential buyers for the rig.

In the event none of the above transpires by Jun '16, both NAD and SMM will form a joint asset holding company to jointly own the rig with NAD holding a 23% stake while SMM will hold the remaining 77%.

This clanger comes just after the group issued a profit warning that it expects to record a net loss for 4Q15 just two months into the quarter, blaming it on a depressed offshore environment and delivery deferrals.

Market watchers are now increasingly focusing on SMM’s rising unbilled receivables due to deferred payment terms, particularly with the difficulty clients are facing in raising funds and securing chartering contracts.

SMM’s net receivables has risen by more than four-fold since 2013 to about $2.8b as at 9M15 (almost 90% of total equity).

Aside from this latest episode, the following issues continue to plague SMM,
1) Rig cancellation dispute with Marco Polo Marine
2) Further order deliveries/cancellations
3) Brazilian exposure with no payments from the customer since Nov ‘14

SMM is currently trading at 13.59x forward P/E. The street has 3 Buy, 6 Hold and 14 Sell ratings on the counter with a consensus TP of $1.96.