SINGAPORE (July 23): To stay relevant, Sembcorp Marine is transforming itself to take on large scale EPC (engineering, procurement and construction) projects while offering nimble and compact solutions to customers, says CIMB-CGS Securities.

It is also scouting for new technology and intellectual property to widen its service offering, preparing for the rig recovery, says CIMB-CGS, with the latest acquisition of Sevan Marine cylindrical rigs is a case in point.

In a Friday report, analyst Lin Siew Khee says CIMB-CGS was right to expect a loss of $20 million-$40 million for 2Q18 as SembMarine posted loss of $55.6 million which included $27 million of one-off loss for the completion of West Rigel sale.

Revenue rose 38% q-o-q to $1.6 billion due to stronger job flow in rigs and floaters as well as repairs and upgrades. EBIT margin losses narrowed from 6.7% in 4Q17 to 3.7% in 1Q18 and 1.6% in 2Q18 due to improvement in work volume amid a leaner cost environment.

While management has guided for operating margin to be negative in FY18, and improve to positive in FY19, CIMB-CGS expects recognition of Karish floating production storage and offloading (FPSO), a sizeable order of $476 million, and high-margin Shell Vito floating production unit (FSU) could lift op margin by 4Q18.

“We see EBIT margin of 0.4%/0.5% in FY18F/FY19F,” says Lim.

Notable projects include Rosebank FPSO (US$1 billion or $1.36 billion), SeaOne two compressed liquid natural gas carriers (US$600 million) and Gravifloat (US$1 billion). Year to date, SembMarine has secured $730 million of orders or 37% of CIMB-CGS’s $2 billion order forecast for FY18F.

Revenue from ship repair grew 59% q-o-q to $126 million in 2Q18. SembMarine repaired/upgraded a total of 158 ships in 1H18, with higher average revenue per vessel of $1.2 million vs $1 million in FY17. Management expects to see some uptick of repair in 2H18 with more LNG vessels and ballast water treatment system and gas scrubber jobs.

Including West Rigel, SembMarine has fully monetised the inventory of 10 risky rigs. Balance sheet should gradually improve by 1Q19F with the remaining US$1 billion to be collected as these rigs are delivered. SembMarine has delivered five out of nine Borr Drilling rigs since 4Q17. Three more units will be delivered in 2H18F and another in 1Q19F.

“Our FY18F EPS is cut 15% to include the loss from West Rigel sale,” says Lim, “Our target price of $2.52 is still based on 2.2 times CY18F book value.”

As at 10.57am, shares in SembMarine are trading 10 cents lower at $1.86.

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