(Aug 5): Disappointing results, slow order momentum and a weak outlook by the management are among reasons why investors should stay on the sidelines or consider getting out of Sembcorp Marine. Another factor is the potential blowback from a Brazilian bribery investigation that could further pummel shares of the offshore and marine services provider.

Unsurprisingly, analysts have turned bearish on SembMarine’s prospects. CGS-CIMB’s head of research Lim Siew Khee -expects the company’s weak orders to translate into widening losses in 2H2019 and estimates an earnings before interest and tax margin of about 2.5% to 3.3% for FY2020 and FY2021.

She expects SembMarine to report losses of $71 million and $500,000 in FY2019 and FY2020, respectively. She has also downgraded her recommendation on the stock to “reduce” from “add”, and lowered its price target to $1.16 from $1.75 previously. “A negative outcome of the [Operation] Car Wash investigation, poorer-than-expected orders and impairment of [its] Brazilian yard are key de-rating catalysts,” writes Lim in a July 30 note.

Similarly, UOB KayHian is downbeat on SembMarine’s prospects ahead. The brokerage lowered its earnings forecast for FY2019 to a loss of $18 million, from a net profit after tax of $48 million previously. It also lowered its FY2020 NPAT forecast by 44% to $28 million.

However, UOB KayHian is keeping its “hold” rating for the stock, albeit with a lower price target of $1.32, down from $1.83 previously. “We note that going into the 1HFY2019 results, consensus earnings were on the high side, in our view. We believe that SembMarine’s earnings revision momentum may continue to be negative in the next week or so as forecasts are adjusted down,” it says in a July 31 note.


Disappointing order book

For 2QFY2019, SembMarine reported a net loss of $9 million. This was 85% lower than a net loss of $56 million in the same quarter last year. Revenue more than halved to $731 million from $1.63 billion previously. However, excluding the revenue recognition from the delivery of two jack-up rigs to Borr Drilling and the sale of a semi-submersible rig in 2QFY2018, revenue in the current quarter would be $722 million. This is an increase of 26% from $572 million in 2QFY2018.

The company had a net gearing of 1.42 times as at June 30, compared with 1.47 times as at March 31 and 1.44 times as at Dec 31. To strengthen its balance sheet, SembMarine had obtained a $2.0 billion five-year subordinated loan facility from its parent and largest shareholder Sembcorp -Industries. The company will use the funds to retire about $1.5 billion of existing borrowings, and re-profile the remaining borrowings with longer-term maturities. The balance $500 million will be used for working capital and general corporate purposes.

The company had a net order book of $5.27 billion as at June 30, with completion and deliveries until 2021. This is lower than its net order book of $6.21 billion as at Dec 31. Excluding Sete Brasil’s drillship contracts, SembMarine’s order book stood at $2.1 billion as at June 30, down from $3.09 billion as at Dec 31 2018. Sete Brasil was a large customer and its financial difficulties and bankruptcy filing in 2016 hit SembMarine hard. 

At SembMarine’s 1HFY2019 results briefing on July 31, president and CEO Wong Weng Sun conceded that new orders traction had been disappointing, with about $175 million in new orders in 1H. “This was due mainly to a tender cancellation arising from changes in project ownership, and delays in final investment decisions for several projects,” he said.

Wong added that the company’s key priority is to rebuild its order book. “We have been actively responding to an increasing pipeline of tenders and enquiries for various engineering solutions and projects related to the production and gas value chain segments, as well as in specialised shipbuilding projects.”

He is, however, cognisant of the challenging industry outlook and reckons that SembMarine will remain in the red. “Overall, challenges in the offshore and marine sector persist, and it will take some time before we see a sustained recovery in new orders, while competition remains intense and margins compressed. With insufficient new orders secured in the last few quarters, the company is expecting the losses for the second half to be higher than the first half, with the full-year losses projected to be [in a] similar range to last year’s losses.”

Quiet on Brazil

Meanwhile, SembMarine remained tight-lipped in response to questions about a search conducted by local authorities at the premises of its subsidiary in Brazil, -Estaleiro Jurong Aracruz (EJA). Semb-Marine director of group finance William Goh, who was present at the briefing, declined to elaborate on the matter, though he acknowledged that the search was conducted in “early July”.

According to SembMarine’s pre-market fi-ling on July 3, the Brazilian federal police had conducted a search of EJA’s premises. The raid, it said, was in relation to ongoing investigations against EJA’s former consultant, Guilherme Esteves de Jesus, who was arrested on March 27, 2015. Within two days of the announcement, shares of SembMarine tumbled, wiping out some $250 million in market value.

“Unfortunately, we’re not in a position to give [further details] given that things are still ongoing,” Goh said. “In terms of how things will continue to progress, as and when there are significant developments we would announce accordingly, which we have [done] over the last couple of years,” he added. Asked whether the Singapore authorities are involved in the probe, Goh again remained mum. “You know that we can’t comment for anything beyond what we have announced,” he said.

In the same July 3 filing, Martin Cheah Kok Choon, former president of EJA, was named for the first time as part of the probe. In a subsequent filing on July 8, the company said Cheah had been reported to the Commercial Affairs Department of the Singapore Police Force.

In 2015, de Jesus was accused of paying bribes to Brazilian officials on behalf of SembMarine. The allegation was made by Pedro Jose Barusco, the Petrobras executive who reportedly alleged that Keppel Offshore & Marine’s former agent, Zwi Skornicki, had paid millions of dollars in bribes to Brazilian officials. Following the allegation, SembMarine issued a statement saying it had not made any illegal payments, and that the group’s policies and contracts prohibited bribery and unethical behaviour.

Shares of SembMarine closed at $1.35 on July 31 — a 52-week-low, and down 12.34% year to date. At this level, the company has a market value of just over $2.82 billion.