Sembmar

Sembmar: The beleaguered rig-builder posted a 1Q16 net profit slump of 48.2% y/y to $54.8m, mainly shored up by one-off gains of $19.2m. Otherwise, earnings would have missed consensus estimates.

Revenue dived 29.6% to $918.4m on a 43% drop in contributions from its rigs & floaters to $540m due to suspension of project revenue recognition arising from customer deferments.

The topline drag was further exacerbated by slippage in repairs and upgrades to $99.2m (-0.9%), partially mitigated by its offshore platform projects, which contributed $261m (+10%).

Gross margin contracted to 8.8% (-4.2ppt) on increased depreciation charges from its Tuas and Brazilian yards.

Bottom line was affected by:
1) $3m in writeback of prior year's bonus provision
2) $6.9m in net FX gains (1Q15: $13m loss)
3) $9.3m in FV gains on reclassification of its stake in Gravifloat
4). 87.4% jump in finance costs to $17.9m on higher bank borrowings
5) 32.5% slump in contributions from associates and JVs of $2.6m, largely tagged to Cosco Shipyard Group

During the quarter, the group secured $60m worth of offshore platform contracts. Nevertheless, order book slipped 6.7% q/q to $9.7b, its lowest level since 3Q12.

In line with the rig delivery deferrals, the group's operations saw cash outflows of $72.9m eroding its cash hoard to $955.3m (-15.1%).

Net gearing deteriorated to 1.15x from 0.29x a year ago (4Q15: 1.03x), which is a worry.

Moving forward, management opines that this current down-cycle is expected to be more protracted than previous ones and was disappointed that the Doha energy talks failed to stabilise the market.

Focusing on Sete Brasil, management has initiated arbitration against the Brazilian company's bankruptcy proceedings. SMM shared that upon getting court approval, Sete would have 60 days to propose a recovery plan and that this would be a key milestone to watch out for.

Maybank KE is generally not surprised by SMM's results given its lowered FY16 expectations. While management maintained that its $329m provision for Sete Brasil contracts in 4Q15 was sufficient at this point, the house opines that writedowns may needed for its $1b yard investment in Brazil.

At current prices, SMM is trading at 15.6x forward P/E and 1.4x P/B. However, P/B valuation may no longer be a useful measure given the recent fire sale of two drillships at 10% of original costs.

Latest broker ratings:
CIMB maintains Sell with TP of $0.90
UOB Kay Hian maintains Sell with TP of $0.90
Maybank KE maintains Sell with TP of $1
Credit Suisse maintains Neutral with TP of $1.20