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Morningstar | Another Loss-Making Quarter for Sembcorp Marine; Shares Overvalued

While we projected no-moat Sembcorp Marine, or SMM, to be loss-making in 2018, the net loss of SGD 80.1 million for the year to Sept. 30 (versus net profit of SGD 142.9 million a year ago) was worse than expected. The SGD 29.8 million third-quarter net loss represented a narrowing from the second-quarter level, but margins remain depressed due to lower overall work volume. We still expect the firm to turn around in 2019 when contributions from new orders kick in, but we reduce our fair value estimate to SGD 1.18 from SGD 1.20, after fine-tuning our model. For investors that wish to gain exposure to the offshore and marine, or O&M, sector, we think Keppel is more attractive, as its O&M segment has stabilized and is profitable.

Management continues to guide for negative operating profit in the coming quarter, and similar to Keppel, the firm believes that despite initial signs of improvement in the O&M sector, it will take time for orders to recover, as the rig market is still oversupplied. There is some momentum in the repairs and upgrades segment, underpinned by the installation of ballast water treatment systems and gas scrubbers, but we think this segment is too small to move the needle.

Meanwhile, SMM has won about SGD 900 million of new orders year-to-date, and management is guiding for more new orders by year-end 2018. The progress still trails our original expectation of SGD 2.0 billion for full-year 2018, and we have reduced our projection to SGD 1.2 billion. Our new contract wins forecast of SGD 3.0 billion in 2019 is unchanged.

SMM's net gearing ratio has further deteriorated to 1.4 times from 1.3 times in the previous quarter, owing to working-capital needs and capital expenditure. Nonetheless, we are not overly concerned, as the progressive collection of over USD 1.4 billion from the sale of rigs should improve SMM's liquidity.