SINGAPORE (Aug 30): CGS-CIMB Research is maintaining “overweight” on the offshore & marine (O&M) industry while highlighting Sembcorp Marine (SMM) as its top “add” pick in Singapore with a target price of $2.52, based on 2.2 times CY18F price-to-book value, its five-year average.
SMM and South Korea’s Daewoo Shipbuilding & Marine (DSME) are the last two contenders for Chevron’s Rosebank project on the UK Atlantic Margin. The floating production storage & offloading (FPSO) project comes has an estimated contract value of US$1.4-1.5 billion ($1.9-2 billion).
In a Wednesday report, analyst Lim Siew Khee says she believes SMM has the upper hand over DSME in terms of cost by being nimble to customise, as evident in its recent contract from Shell to build and integrate the hull, topsides and living quarters of the Vito semi-submersible floating production unit (FPO).
See: Shell Vito win keeps SembMarine at 'add' by CGS-CIMB
“We think SMM is also able to offer a more competitive pricing given the 15-20% lower labour cost structure in Singapore vs. Korea. As such, we think SMM could command better EBIT margins of 5-6% and 2-3% for DSME. The project EBIT margin could stretch up to 8-10% if the scope excludes equipment,” says Lim.
The analyst however remains cognisant of DSME’s comparatively better track record and financing, given how the company is backed by the Korean government and more well-known for its construction of semi-submersibles, drillships and LNG carriers.
“Given SMM’s high net gearing of c.1.3 times, the yard may not be able to offer compelling financing but stick to progressive payments,” notes Lim.
In terms of cost management, she views SMM and DSME are on par, with the former company having the advantage of exposure to North Sea projects.
Going forward, Lim is expecting better q-o-q earnings for SMM in 3Q18 in the absence of a one-off loss recognised in the previous quarter. She is also anticipating higher q-o-q revenue with more progressive recognition on Transocean drillships, Statoil FPSO, and Technip FMC’s FPSO.
“YTD, the Singapore yards have clinched c.US$600-900 million each of offshore orders with little exposure to rigs. The orders are dominated by LNG/dredgers with a semi-submersible for KEP while SMM focused more on FPSO newbuild/integration,” comments Lim.
As at 11:30am, shares in SMM are trading 1 cent lower at $1.68 or 1.48 times CY18F book.
