Friday, July 29, 2016

Sembcorp Marine

Sembcorp Marine's (SMM) 2Q16 net profit sank 90% to $11.5m after taking hits from rig delivery deferments, FX loss, higher finance costs and asset impairment. This brought 1H16 earnings of $66.3m (-69.2%), which included one-off gains, only met 31% of full-year consensus forecast.

For the quarter, revenue tanked 25% to $908.5m, as improvement in its offshore platform activities (+31.1%) business was unable to overturn the delays in its rigbuilding projects (-46.3%) because of customer delivery deferments and weaker repairs & upgrade business (-12%). In all, another four jackups (3 for Oro Negero, I for Perisai) were deferred.

Operating margin narrowed to 5.9% (1Q16: 7.8%, 2Q15: 12.2%) as the yard booked a $35m FX translation loss on revaluation of its UK and US assets, as well as increased depreciation charges from its new Tuas and Brazilian yards.

Bottom line was further pummelled by:
1) Doubling in finance cost to $22.5m on higher borrowings
2) $8.4m impairment loss on asset available-for-sale
3) 80.4% spike in losses from associates and JVs to $4.7m

While net gearing crept up to 1.1x from 1.03x in FY15, management resassured that this has since fallen below 1.0x following receipt of $900m cash payment from the recent delivery of a Noble jackup, Modec FPSO and Ivar Aasen topsides.

In view of the dismal results, interim DPS has ben slashed to 1.5¢ (1H15: 4¢).

The group secured $260m of variation orders relating to platforms and floaters in 2Q16, bringing its 1H16 contract wins to $320m, or just 20% of Maybank KE's full year estimate of $1.6b and 10% of the FY15 contracts ($3.2b).

Accordingly, net order book continued to deteriorate to $9.2b (FY15: $10.4b, FY14: $11.4b). Excluding the financially distressed Sete Brasil contracts, this would have shrunk to $6b.

On outlook, management expects the offshore downturn to persist, and business environment to remain challenging amid substantial cuts in capex among oil and gas firms.

There was also no significant progress since Sete Brasil filed for judicial restructuring on 29 Apr '16 and arbitration proceedings for a terminated Marco Polo Marine jackup rig is underway.

Maybank KE retains its negative view on SMM as rigbuilding activities will be among the last to benefit from any industry recovery. With China emerging a major offshore rig player, local yards are at risk that the next upcycle may not return to Singapore.

Sembcorp Marine is currently trading at historical low of 1.2x P/B, but this may no longer be a useful measure after fire sales of several drillships at a fraction of original costs. Consensus forward P/E of 14.6x is also susceptible to downgrades by the street.

Latest broker ratings:
Maybank KE maintains Sell, with TP of $1.00
CIMB maintains Reduce, with TP of $0.90
Credit Suisse maintains Neutral with TP of $1.20
Deutsche maintains Buy, with TP $1.44

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