Investors onboard Sembcorp Marine (SMM) has found themselves in murky water after the disappointing results for 4Q17. The net loss of $33.8 million recorded for the period must have surprised many of the market participants that were expecting slightly better results.

Despite the negativity, we take a look at the three main catalysts that DBS Research has highlighted in which to encourage investors to accumulate at current prices while reducing its target price of $3.10 to $2.90 on a conservative approach.

Future Order Prospects Remains Bright

Moving forward, SMM maintains a strong order pipeline which could possibly translate into $3 billion worth of new orders in 2018 estimated by DBS. The orders include letter of intent signed with SeaOne Carribean to build two large Compressed Gas Liquid carriers amounting to $800 million and the final phase of its very first Gravifloat, modularised LNG exporting terminal for Poly-GCL amounting to $1 billion.

In the latest reports, SMM currently holds an order book of $7.58 billion as at 31-December-2017. This includes a $1.1 billion order for Borr Drilling that is expected to be recognised in 2018, accompanied with $3.2 billion from drillship projects with Sete Brasil which is expected to recover from 2019 onwards. As for the remaining $3.3 billion worth of orders, it will be recognised over the next two years.

Revival Of Sete Brasil Rig Orders

The revised restructuring proposal for Sete Brasil submitted at end-Aug 2017 is currently pending approval, upon completion the issue will most likely come to a resolution. DBS also believe that Singapore rig builders are poised to deliver minimally 4 rigs each that are in advanced stages of construction, out of Sete Brasil’s existing 13 orders valued at $1 billion each. The revival in rig construction sector will help lift SMM’s bottom-line.

Resolve & Conquer

In the latest transactions, the agreement to sell nine jackup rigs to Borr Drilling for US$1.3 billion and the sale of semi-submersible rig, West Rigel, which incurred $24 million losses have diminished all the problematic rigs that were deferred due to the oil price crash in 2015.

Considering that there will be positive write-back of provision from rig sales, increased merger and acquisitions activities and even rumours of privatisation would send the stock price soaring high. Nevertheless, DBS estimated that SMM will sit at a target price of $2.50 as the forecasted merger and acquisitions premium is said to be about 40 cents, in case privatisation rumours are off the table.

Financial Overview

Management has advised that the Capital Expenditure (CAPEX) for FY18 will not exceed $500 million but will be slightly higher than FY17’s CAPEX of $178 million, which will be used for the development in phase three of Tuas yard. In view of growing CAPEX to meet the demand of potential orders in pipeline, a capital raising will not be far away.

Net gearing ratio fell to 1.1 times from 1.3 times in the previous quarter, mainly due to the US$500m deposit received from Borr Drilling. Considering that Borr Drilling has fully paid up all proceeds by 2019, SMM’s net gearing ratio could further improve to 0.7 times while it might also be slightly offset by the higher CAPEX incurred.

Net asset value per share also fell by 3.9 cents to 118.7 cents while earnings per share plunged by 82.1 percent to 0.67 cents. The total dividend paid out for the full year is 2 cents. Given that most of the projects will only be completed in the later part of the year, dividend payout is likely the same for the next few years.

Even though the industry outlook remains challenging for SMM, we believe there are few catalysts in sight that could push Sembcorp Marine’s share price upwards into a money bag.

BUY at $2.22; TP at $2.90


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