Morningstar | A Slow Start for SembCorp Marine’s 1Q Results; Stronger Second Half Expected; Still Overvalued
Our fair value estimate of SGD 1.20 is unchanged following no-moat SembCorp Marine’s lackluster first-quarter results. We believe the firm remains overvalued presently, and we think Keppel Corp may offer a better risk-reward proposition for investors who would like to get exposure into the offshore and marine, or O&M, sector, given Keppel’s stronger order book and healthier balance sheet.In line with Keppel, SembCorp is also seeing improvement in the O&M sector, citing rising capital expenditures for offshore exploration and production as well as higher day rates and utilization levels for offshore drilling activities. However, competition remains intense, and it takes time to translate active inquiries into new orders. In terms of new orders win, SembCorp’s SGD 175 million new contracts for the first quarter was significantly behind Keppel’s SGD 1 billion. That said, we understand that project wins can be lumpy, and we maintain our SembCorp new contract wins forecast of SGD 2.5 billion for 2019. We believe a swift resolution with Sete Brasil will also be a catalyst for the firm.
Net gearing ratio remained high at 1.5 times, due to increased capital expenditure and working capital requirements, but we expect this to improve. Capital expenditures should be lower going forward following the completion of the headquarters at Tuas Boulevard Yard and investment in new capabilities. In addition, management is still evaluating the option to securitize its SGD 1.2 billion deferred payment for rigs to fund its operations when necessary.
Stripping out non-recurring items (due to accelerated depreciation at Tanjong Kling Yard), SembCorp’s operating profit of SGD 12 million for first-quarter 2019 was an improvement from operating loss of SGD 33 million a year ago. Meanwhile, net profit dropped 68% year over year to SGD 1.7 million, falling short of our expectations but we expect results to be stronger in second-half 2019 on delivery of projects.
Overall, we expect SembCorp to be profitable in 2019 compared with net loss in 2018.
Sembcorp Marine is a marine and offshore engineering group. Co. is engaged in the provision of management services and investment holding. Co. provides a portfolio encompassing a range of integrated solutions from ship repair, shipbuilding, ship conversion, rig repair and rig building to offshore engineering and construction. Co. has two reportable segments: ship and rig repair, building and conversion; and ship chartering. In addition, Co.'s other operations include bulk trading in marine engineering related products; provision of harbor tug services to port users; collection and treatment of used copper slag; and the processing and distribution of copper slag for blast cleaning purposes.
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