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Improving order outlook keeps SembMarine at 'buy' despite 4Q provisioning of everything but the kitchen sink

Michelle Zhu
Michelle Zhu • 2 min read
Improving order outlook keeps SembMarine at 'buy' despite 4Q provisioning of everything but the kitchen sink
SINGAPORE (Feb 22): CIMB is maintaining its “add” call on Sembcorp Marine (SMM) at a higher target price of $3.01, which is now based on a 20-year average of 2.5 times book value.
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SINGAPORE (Feb 22): CIMB is maintaining its “add” call on Sembcorp Marine (SMM) at a higher target price of $3.01, which is now based on a 20-year average of 2.5 times book value.

This comes even as the group’s 4Q net loss of $34 million came in wider than that of consensus and the research house’s forecasts, which was attributed by the management on weak operating leverage, negative variation order and cost overrun for delivered & existing floaters.


See: SembMarine swings into the red in 4Q with $33.8 mil loss

In a Wednesday report, analyst Lim Siew Khee says she has cut EPS forecasts for FY18-19 by 18-30% to incorporate the cost write-down for West Rigel and lower margin expectations.

This is however offset by higher order win expectations with a better order outlook compared to six months ago, which has led CIMB to up order expectations to $3 billion per annum for FY18-19 in view of improved enquiries.

“SMM has two outstanding Letters of Intent (LOI) - Shell Vito floating production unit (we estimate U$300-400 million) that may finalise in 2018 and SeaOne for two large compressed gas liquid carriers (we estimate U$500 million), likely to be finalised in 2019,” says Lim.

She nonetheless remains cognisant of the competitive operating landscape, which she thinks could compress margins on new projects to comparable levels with Korean yards.

Despite the group’s improved balance sheet from milestone receipts in the latest quarter, Lim also believes this could be slightly negated by higher capex.

“Management guided that capex for FY18 is likely to be slightly higher than FY17’s ($178 million) but below $500 million. Capex will be incurred for the development of Tuas yard (partial phase 3). It has spent about $1.7 billion to develop Tuas phases 1 and 2 since 2010. The capex quantum is correlated to the potential orders in the pipeline, to enhance capabilities, automation process and cost saving needs. Cash call could be a risk for this,” says the analyst.

As at 10.40am, shares in SMM are trading 6.84% lower at $2.45, or 2.05 times FY18 book value.

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