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SembMarine at 'turning point' but future order wins critical: analysts

Stanislaus Jude Chan
Stanislaus Jude Chan2/21/2019 03:22 PM GMT+08  • 3 min read
SembMarine at 'turning point' but future order wins critical: analysts
SINGAPORE (Feb 21): Analysts believe Sembcorp Marine (SMM) could be on the cusp of a turnaround, after swinging out of the red with earnings of $5.9 million for 4Q18.
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SINGAPORE (Feb 21): Analysts believe Sembcorp Marine (SMM) could be on the cusp of a turnaround, after swinging out of the red with earnings of $5.9 million for 4Q18.

While the group’s 4Q performance was a long way off its restated 4Q17 earnings of $117.3 million, it had beat expectations of another net loss in the latest quarter.

“4Q18 net profit of $5.9 million beat our expectation of $24 million losses,” says CGS-CIMB Research analyst Lim Siew Khee in a Wednesday report.

The 4Q18 earnings brings Sembmarine’s net loss for the full-year to $74 million for FY18, which included a loss of $34 million on the sale of the West Rigel rig.

According to Lim, this is lower than CGS-CIMB’s forecast of a net loss of $104 million in FY18, and consensus forecast of a net loss of $98 million.

As such, CGS-CIMB is keeping its “add” rating on Sembmarine, which it believes could be at a “turning point”.

However, the brokerage is lowering its target price to $2.21, from $2.46 previously, on the back of a 2-21% cut earnings per share (EPS) estimates for FY19-20 due to lower expectations on order wins and higher depreciation.

CGS-CIMB is lowering its FY19-20 order targets to $2-2.5 billion, from $3.5 billion per year previously, after order wins in 2018 came in at $1.2 billion, falling below the expected $1.5 billion.

“It is encouraging to see the group swing into the black after being in the red in the previous quarters, but what would catalyse the stock price is still new order flow that is sustainable going forward,” OCBC Investment Research analyst Low Pei Han.

According to Low, offshore rig orders will take some time to recover as the market remains oversupplied.

“Management also reminded that the lead time for new orders, depending on the size and scope of work involved, may take six months to slightly more than a year, as solutions are more customized (rather than standardized) and a certain level of co-development with the client may be involved,” Low adds.

OCBC is maintaining its “hold” call on Sembmarine and raising its fair value estimate to $1.77, from $1.73 previously.

On the other hand, DBS Group Research is more bullish on Sembmarine’s contract wins.

“While order wins, a critical leading indicator for earnings recovery, has been lagging behind expectations in 2018… we remain optimistic that offshore capex is set to recover,” says analyst Ho Pei Hwa in a Thursday report. “We believe SMM’s strong order pipeline would translate into $3 billion or more in new orders in 2019.”

DBS is reiterating its “buy” recommendation on Sembmarine with an unchanged target price of $2.40.

The way Ho explains it, Sembmarine’s share price has yet to reflect the brighter outlook ahead, and an uptick in order flow would be a key re-rating catalyst.

“Order wins and order book trends are often the key drivers of rig builders’ share prices and earnings,” Ho adds. “SMM is turning the corner with operational improvements and more upbeat order win prospects.”

As at 3.18pm, shares in Sembmarine are trading 1 cent higher, or up 0.6%, at $1.69. According to DBS estimates, this implies an estimated price-to-earnings (PE) ratio of 68.3 times and a dividend yield of 0.6% for FY19.

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