SINGAPORE (Oct 30): Analysts are keeping their “hold” recommendations on Sembcorp Marine amid an expected slow recovery.

“Overall, despite the improved industry outlook, management mentioned ‘it will take some time’ before there is a sustained recovery in new orders, while competition remains intense and margins are compressed,” says OCBC Investment Research analyst Low Pei Han in an Oct 26 report.

OCBC has a fair value estimate of $1.73 on SembMarine.

SembMarine reported a loss of $29.8 million in 3Q18 on continued low overall business volume.

See: SembMarine sinks into $30 mil loss in 3Q on continued low overall business volume

“Overall business volume and activity for the group is expected to remain low for the immediate quarters,” Low says. “While offshore drilling activities have shown initial signs of improvement, offshore rig orders will take some time to recover as the market remains over-supplied.”

The way UOB Kay Hian analyst Foo Zhi Wei sees it, SembMarine’s losses are likely to continue into 2019.

“We reckon that losses are likely to continue into 1Q19 at least,” says Foo in a report on Oct 26. The brokerage has a target price of $1.83 on SembMarine.

“By our estimates, assuming a revenue run rate of $800-900 million going forward, the offshore engineering’s operating margin has to improve to 2-3% before a profit can be seen. This also assumes that net interest expense continues to fall,” Foo says. “Judging by the offshore engineering’s 3Q18 operating margin, it is probable that the current orderbook remains insufficient to cover overheads.”

At the same time, the analyst notes that SembMarine could be hindered by its high net gearing.

“The outlook for contracting is improving going into 2019. However, [SembMarine’s] high net gearing could be a possible impediment to securing more contracts. Potential clients do take into consideration the shipyard’s balance sheet strength when selecting yards,” he says.

Meanwhile, Phillip Securities Research has upgraded SembMarine to “neutral” due to the recent price correction. However, the brokerage has lowered its target price to $1.65, from $1.78 previously.

Two key factors are directing the recovery of [SembMarine]: capex on E&P and vibrancy of upstream drilling and production activities (measured by charter rate and utilisation rate),” says analyst Chen Guangzhi in a report on Oct 29.

“Since [SembMarine’s] business is order book- driven, we have not seen any evident signal that its profitability will turn around in the near turn. In a nutshell, the survival mode is still on,” Chen adds.

As at 2.30pm, shares in SembMarine are trading 3 cents down, or 1.9% lower, at $1.59. According to UOB valuations, the stock has an estimated price-to-earnings ratio of 1.6 times and a dividend yield of 0.6% for FY19.