SINGAPORE (Mar 5): Sembcorp Marine saw its earnings collapse in 2017, but this might not be the time for investors to run for cover. In fact, even after a sharp pullback this past week, its share price is up 13% since the beginning of this year, and some analysts say it could rise even further. Meanwhile, Sembcorp Industries has dismissed talk in the market that it is close to either divesting the offshore and marine company or taking it private.
“The best time to reinvest in the business is in the downcycle,” Neil McGregor, CEO of Sembcorp, said at a results briefing on Feb 23.
“But it takes a strong stomach to do that, and that’s why we’re supporting them right through the cycle.” For FY2017 ended Dec 31, SembMarine reported an 82% slump in earnings to $14 million, on a 33% decline in turnover to $2.39 billion. The huge drop in full-year earnings was largely due to a $33.8 million loss in 4Q2017, on turnover of $655 million, down 21%.
SembMarine attributed the poor performance in 2017 to lower revenue recognition for rigs and floaters and offshore platform projects. There was also the termination of five jack-up rig contracts, which resulted in a reversal of sales that had been previously recognised. SembMarine also incurred additional costs for floater projects that were still pending finalisation with customers.
Wong Weng Sun, CEO of SembMarine, says the outlook for rig orders has been improving over the last six months, though competition remains fierce. “Rig orders recovery may take some time, as the oversupply in most drilling segments has yet to rebalance,” he said during the company’s results briefing on Feb 21. Wong later told The Edge Singapore that he was most optimistic about work in the deepwater and harsh environment segment.
Last year, SembMarine managed to secure $2.74 billion worth of new orders, including a US$145 million ($192.1 million) contract for hull carryover works awarded by Brazilian state-owned oil company Petrobras. Its net order book is worth $7.58 billion, with deliveries stretching to 2020.
SembMarine is moving ahead on several other fronts too. Notably, it is building its 206ha Tuas Boulevard Yard in phases, with the aim of consolidating all its shipyards at the facility by 2024. It has six dry docks designed to handle mega-sized vessels, such as Very Large Crude Carriers, LNG carriers and passenger ships. The yard also has an extrawide dock for the construction and repair of offshore structures.
Last year, SembMarine repaired and upgraded a record number of 16 cruise ships, and has signed partnerships with Star Cruises, Carnival and Royal Caribbean Cruises. All in, SembMarine repaired 390 vessels last year, with a higher average repair value per vessel of $1.21 million, versus $0.98 million previously.
Another potential growth driver for SembMarine is the impending regulations on ballast water management systems, which are now expected to come into force in 2019. The company has completed 11 installations and retrofits of ballast water treatment systems, and has also developed its own system, using patented technology.
Brazil overhang
At the height of the offshore and marine cycle, SembMarine saw a steady flow of contracts to build rigs, offshore drilling and production vessels and, most significantly, drillships, designed to operate in the deepest of offshore oilfields. In FY2010, it reported earnings of more than $860 million, on the back of more than $4.5 billion in revenue.
In 2012, the company secured contracts to build seven drillships, worth some US$5.5 billion, which were to be chartered to Petrobras. The contracts were secured through Sete Brasil, a drilling rig charterer linked to Petrobras.
In mid-2014, however, oil prices went into a tailspin, and orders for oil and gas exploration equipment evaporated. In addition, SembMarine’s contracts related to Brazil and Petrobras have come under scrutiny in the wake of a bribery scandal that has hit Keppel Corp, whose offshore and marine arm was also a supplier of rigs to Petrobras.
At SembMarine’s recent results briefing, Wong confirmed that Guilherme Esteves de Jesus, a Brazilian consultant hired by its subsidiaries in Brazil, had been arrested in relation to allegations of illegal payments in connection with drillship construction contracts in Brazil. SembMarine said in March 2015 that it had started internal investigations into the allegations. SembMarine officials have declined to disclose further details, stressing that their internal investigation “is ongoing and remains legally privileged”.
In 2015, SembMarine reported a loss of $289.7 million, as it made a $329 million provision for the seven drillship contracts from Sete Brasil. In April 2016, Sete Brasil filed for bankruptcy. Excluding the Sete Brasil drillships, SembMarine’s net order book would be $4.45 billion instead of $7.58 billion.
Improving outlook?
Although SembMarine’s drillship contracts from Sete Brasil are in limbo, analysts and investors were turning more bullish about the company earlier this year. In fact, there was a spike in investor interest, beginning in mid-January, which triggered a query about trading activity from the stock exchange. In its response on Jan 23, SembMarine noted that ratings upgrades from stockbrokers could have had an impact on the share price.
On Feb 2, the stock hit another one-year high of $2.81, following an upgraded “buy” call from Deutsche Bank. The stock fell sharply in trading on Feb 12, however, losing nearly 12% by the end of the trading day from the previous week’s close. That resulted in another query from the exchange regulator. The company said it was not aware of any possible explanation for how its stock traded.
Since the company’s most recent earnings report, its shares have fallen about 21%. Some analysts say they were surprised by the loss that SembMarine reported for 4QFY2017, and subsequently trimmed their forward earnings estimates. For instance, UOB Kay Hian’s Foo Zhi Wei and Andrew Chow cut their 2018 and 2019 earnings estimates by 75% and 56%, to $27.3 million and $61.3 million, respectively. They have downgraded the stock to a “hold”, with a price target of $1.90, which is equivalent to 1.6 times forecast book value for FY2019.
More bullish is CGS-CIMB Securities Research analyst Lim Siew Khee. She has cut her earnings forecasts for FY2018 and FY2019 by 18% to 30%, to take into account lower margin expectations, as well as a cost writedown for the sale of the West Rigel semisubmersible drilling rig for US$500 million. The rig was originally built for Seadrill and North Atlantic Drilling, both of which have filed for bankruptcy protection, and SembMarine will take a $24 million loss on the disposal.
CGS-CIMB is keeping its “add” call on the stock, however, and has raised its price target by 21% to $3.01. That is equivalent to 2.5 times the company’s forecast FY2018 book value, which is the stock’s average price-to-book valuation over the last 20 years. The brokerage has raised its order win expectations to $3 billion for these two years, noting that SembMarine has two outstanding letters of intent, estimated to be worth at least US$800 million, which could be translated into contracts this year and next.
Shares in SembMarine are trading about 60 times forward earnings and 1.8 times book value.
