SEMBCORP MARINE: It takes only one negative trigger

Excerpts from analyst's report

CIMB analyst: Lim Siew Khee (left)

It only takes one negative trigger

We believe the current share price has not priced in any negative triggers, such as delays in delivery, order cancellations and margin disappointment. Earnings deterioration could be worse than expected if order momentum continues to stall. Maintain Reduce.

We recently tempered our order target for 2015 to S$1.2bn, benchmarking the global financial crisis level. We maintain our EPS and target price, still based on 11x CY16 P/E (-1 s.d from its 13-year trading average). De-rating catalysts could come from order cancellations, impairment of project costs in Brazil or deferrals of non-Brazilian projects.

Long wait for contracts to finalise

SMM recently entered into an exclusive letter of intent (LOI) with Dutch Heerema Offshore Services for the engineering and construction of a new semi-submersible crane vessel. We believe the final awarding of the contract could drag into 2H15 as negotiations could still be ongoing. Closing of new contracts is taking longer than expected on the back of volatile oil prices and depressed sentiment in the sector amidst capex cuts among oil majors. If awarded, this project could fetch SMM US$400m-500m. As with any new contract, we believe margins for the project could range between 8% and 10%, especially with fierce competition from the Korean and Chinese shipbuilders.

Riskier in Brazil

Stock price (10 Apr 2015)	$2.98
52-week range	$2.85 – $4.15
PE (ttm)	11.1
Estimated P/E (12/2015)	11.3
Market cap	S$6.2 billion
Price/book	2.1
Dividend yield Bloomberg data	4.36%

12 months ago, investors were largely wary of SMM’s execution of its first drillship for Sete Brasil in Brazil. Although this has been mitigated by the fact that a substantial portion of work (>80%) is done in Singapore, the focus is now on whether SMM will be able to collect the final payment and complete the project amidst the complicated bribery allegations against Petrobras.

SMM recently announced that the consultant whom the company engaged for its Brazilian projects, Guilherme Esteves de Jesus (GDJ), was arrested on 27 March 2015. SMM could stop work by 2H15 if Sete Brasil continues to delay payments. The next question is whether SMM will be able to mobilise the drillship elsewhere and sell it to other operator.

Sell into strength

We advise investors to sell into strength given the recent spike in share price on the back of higher oil prices.

SEMBCORP MARINE: It takes only one negative trigger

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