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SembMarine kept at 'buy' on optimism offshore capex is poised for recovery

PC Lee
PC Lee • 4 min read
SembMarine kept at 'buy' on optimism offshore capex is poised for recovery
SINGAPORE (May 6): SembMarine’s share price may have come under pressure of late in view of the lacklustre contract wins, but DBS Group Research finds comfort that the company is seeing increasing enquiries.
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SINGAPORE (May 6): SembMarine’s share price may have come under pressure of late in view of the lacklustre contract wins, but DBS Group Research finds comfort that the company is seeing increasing enquiries.

In 1Q19, SembMarine’s earnings came in at $1.7 million, partially lifted by an $1.8 million tax credit, without which it would have registered a slight loss of $0.1 million.

In a Monday report, DBS analyst Ho Pei Hwa says SembMarine’s continued profitability in 1Q19 is encouraging.

And although order wins have been lagging expectations year-to-date, Ho remains optimistic that offshore capex is set to recover.

“We believe SembMarine’s strong order pipeline would translate into $3 billion or more in new orders in 2019,” says Ho.

This may include a Gravifloat modularised LNG exporting terminal at $1 billion; two large compressed gas liquid carriers valued at $800 million and Rosebank’s FPSO contract that could be worth up to US$2 billion ($2.7 billion).

Finally, any re-emergence of yard consolidation speculation could also buoy SembMarine’s share price.

DBS is maintaining “buy” with unchanged target price of $2.40, based on 2.1x FY19F book value which has already taken a massive writedown of $609 million in FY15.

Similarly, CGS-CIMB Research is “relieved” SembMarine was profitable in 1Q19 with EBIT margin close to 1%, versus operating loss in FY18.

SembMarine’s $1.7 million 1Q earnings was in line with CGS-CIMB’s expected $2 million.

1Q19 earnings were partially lifted by an $1.8 million tax credit, without which it would have been a slight loss of $0.1 million.

“1Q19 formed 6% of our FY19 forecast of $34 million as we expect a stronger 2H19F. EBIT margin came in at close to 1%, up from 0.2% in 4Q18,” says analyst Lim Siew Khee.

Year to date, SembMarine’s orders are at $175 million versus $2 billion forecast by CGS-CIMB.

Management is still hopeful of orders given the strong enquiries for its production units.

“Maintain ‘buy’ with $2.21 target price, based on 2 times book value, close to five-year average,” says Lim.

Finally, Phillip Securities Research says SembMarine is expected to continue riding through the cycle with the improving market conditions.

“However, it could face the tightened liquidity issues in the near term due to the drawdown of cash and management is mindful with the working capital turnover,” says analyst Chen Guangzhi.

In 1Q19, Brent oil price recovered from US$50/bbl back to US$75/bbl. Currently, it is trading marginally above US$70/bbl.

The market consensus for the oil price in 2019 is in the range of US$60/bbl to US$80/bbl.

According to Chen, exploration and development spending from the major integrated oil companies is estimated to be US$221 billion, growing 18.8% y-o-y in 2019.

As of 1Q19, net gearing was 1.47, compared to 1.44 by the end of Dec-18. Cash in hand fell sharply to $524.0 million from $837.7 million in FY18.

SembMarine expects to collect $100 million related to the sale of West Rigel rig by Feb 20 while the bulk of US$1.2 billion related to the sale of jack-up rigs to Borr Drilling is to be collected during FY22 to FY24.

Hence, the group could face very tight liquidity this year. Capex for 1Q19 amounted to $77 million, including the installation of new capabilities and completion of corporate headquarters at Tuas Boulevard Yard.

Management believes capex in FY19 could be less than $300 million which depends on both order flows and the current progress of the existing projects. Maintenance capex will be $50 million to $70 million.

Based on the unchanged five-year average of 1.6 times book value, compared to its historical low of 1.0 time book.

Phillip is maintaining its “neutral” recommendation while maintaining its “target price” of $1.76.

Finally, OCBC Investment Research says SembMarine has to be selective when securing new orders, especially those with not too unfavourable payment terms.

This is because SembMarine has to consider the group’s current balance sheet position and that future new orders may increase working capital needs.

It is also therefore not surprising for the group to look for ways to improve its balance sheet, for example through potentially securitising receivables from Borr Drilling, adds OCBC analyst Low Pei Han in a Monday report.

Management has commented that competition remains intense, and production activity for the group is expected to remain low.

Still, global capex spend for offshore exploration and production continues to improve especially for the production segment, while offshore drilling saw improvement in day rates and utilisation levels for some areas.

OCBC is maintaining its “hold” with $1.77 fair value.

Shares in SembMarine closed 9 cents lower at $1.58 on Monday.

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