Document 6559459

Singapore | Industrials
Asia Pacific Equity Research
SEMBCORP MARINE | BUY
MARKET CAP: USD 5.9B
8 Oct 2014
Company Update
AVG DAILY TURNOVER: USD 8M
RECENT SELL-DOWN TOO AGGRESSIVE
Recent sell-down overdone
Drillship has left SG
Upgrade to BUY with 20% upside
•
•
•
BUY (upgrade)
Fair value
S$4.18
add: 12m dividend forecast
S$0.130
versus: Current price
S$3.58
12m total return forecast
Aggressive selling in recent days
Sembcorp Marine’s (SMM) share price has fallen by about 10% since early
Sep, with about half of this drop in the last five trading days. This
compares to the STI’s ~3% fall since early Sep. We believe that this is
partly due to weaker oil prices of late, as well as company-specific factors
such as worries over execution risks for its new drillship.
20%
Analysts
Low Pei Han, CFA (Lead) ● +65 6531 9813
lowph@ocbc-research.com
Carey Wong ● +65 6531 9808
carey@ocbc-research.com
Key information
Market cap. (m)
Drillship has left for Brazil; on track for Jun 2015 delivery
According to news reports online1, the Dockwise heavy-lift vessel Black
Marlin has been seen ballasting down last Friday to load SMM’s first
drillship, the Arpoador. A call with SMM also confirmed that the unit has
left Singapore for Brazil, and SMM reiterated that the unit is on track for
delivery in Jun next year, despite its departure date from Singapore being
delayed for more than six months from its original schedule.
S$7,480 /
USD5,868
Avg daily turnover (m)
S$10 /
USD8
Avg daily vol. (m)
2.5
52-wk range (S$)
3.54 - 4.6072
Free float (%)
39.1
Shares o/s. (m)
2,089.3
Exchange
SGX
BBRG ticker
Execution risk has been lowered with more construction done here
The market has been worried that SMM would fail to deliver its first
drillship on time, especially with the yard in Brazil being new and
inexperienced. While acknowledging these risks, we point out that
execution risk of this unit may actually be lower now with a greater
percentage of the construction work being done in Singapore instead of
the new Brazil yard – at least 70% of the unit has been completed. We
also would not be surprised if SMM has built in a buffer or a grace period,
since this is a new product for the group.
SMM SP
Reuters ticker
SCMN.SI
ISIN code
S51
GICS Sector
Industrials
GICS Industry
Machinery
Sembcorp Industries60.8%
Top shareholder
1m
3m
Company (%)
Relative total return
-9
-11
12m
-17
STI-adjusted (%)
-6
-11
-24
Price performance chart
Significant upside despite lowering margins
We had been forecasting operating margins of 11.7% for FY14 and 12.6%
for FY15 (1H14: 11.3%). To be more conservative, we lower our FY15
margin assumption to 11.9%. With this, we see limited downside risks to
margins. Though our fair value estimate is correspondingly lowered from
S$4.36 to S$4.18, we see a 20.5% upside (this includes a ~4% dividend
yield) on the stock, which is attractive. Upgrade to BUY on SMM, as the
recent sell-down seems to be overdone.
Share Price (S$)
Index Level
5.45
3900
4.99
3560
4.54
3220
4.09
2880
`
3.63
3.18
Oct-13
2540
Jan-14
Apr-14
Fair Value
Jul-14
SMM SP
2200
Oct-14
FSSTI
Sources: Bloomberg, OIR estimates
Key financial highlights
Year Ended Dec 31 (S$m)
Revenue
Industry-relative metrics
FY12
FY13
FY14F
FY15F
4,430.1
5,525.9
5,850.7
6,233.2
Gross profit
694.5
707.8
819.1
872.6
EBITDA
644.8
741.5
830.7
943.3
Mkt Cap
Profit attributable to shareholders
538.4
555.7
568.8
604.0
Beta
25.8
26.6
27.2
28.9
na
na
27.8
29.8
Earnings per share (S cents)
Cons. EPS (SG cents)
Net profit margin (%)
12.8
10.6
10.3
10.3
PER (x)
13.9
13.5
13.1
12.4
ROE (%)
23.3
22.0
20.2
19.3
EV/EBITDA (x)
11.6
10.1
9.0
7.9
1 “Dockwise BLACK MARLIN seen ballasting down last Friday morning at the Singapore to load
Arpoador Drillship”. Heavyliftnews.com. 5 Oct 2014.
Please refer to important disclosures at the back of this document.
Percentile
0th
25th
50th
75th
100th
ROE
PE
PB
Industry Average
Company
Note: Industry universe defined as companies under identical GICS classification listed on
the same exchange.
Sources: Bloomberg, OIR estimates
MCI (P) 004/06/2014
OCBC Investment Research
Singapore Equities
Local content requirements – not really where you build it, but
where you source it
To satisfy local content requirements of at least 50% for the first unit, a
significant amount of equipment and consumables has been procured from
Brazil. Work for certain parts of the drillship is also ongoing in Brazil, such
that they can be fitted onto the hull upon arrival. As the Brazil yard ramps
up subsequently, the plan is to do more physical work in Brazil for the later
drillship units.
Reasonable assumptions buttressing 3% and 6% PATMI growth for
FY14 and FY15
The group has secured about S$2.8b worth of work YTD, accounting for
~70% of our full year forecast. In our model, we have assumed new orders
of S$4b for this year vs. S$4.2b that was secured last year, as well as
S$4.5b for FY15, which we believe is still reasonable despite a slow down in
new order flows and softening in day rates, as the group has a wide
product ranging from drilling rigs to offshore production structures and ship
repair. Meanwhile, our FY15 operating margin assumption has been
lowered from 12.6% to 11.9%, and with this, we see limited downside risks
to margins. Though there are operational risks in Brazil, it is imperative
that the group establishes a firm presence there where the growth
potential is.
BUY when the stock is under-appreciated and unloved
Once the darling of the market, SMM has turned to be the one of the most
shorted stocks of late, with its short sale value accounting for 3-4% of total
shorted stocks from 15-26 Sep. This went up to about 8% on 2 Oct. With a
confluence of negative news such as 1) lower oil prices which may lead to
slow order flow and 2) execution risks for its first drillship, we believe that
investors may want to consider whether it is time to pick up a quality stock
that still has solid fundamentals over the long term.
Exhibit 1: The Black Marlin (heavy-lift vessel) carrying the first drillship, Arpoador, for
departure from Singapore
Source: Andre Korver- Dockwise Shipping B.V
Exhibit 2: Sum-of-parts valuation
Profit after tax
Stake
Valuation type
Multiple
(x)
(S$m)
(S$)
100%
FY14/15F earnings
14
8,148
3.90
30%
FY14/15F earnings
12
158
0.08
4.97%
OIR fv: S$0.61
68
0.03
(S$m)
SMM ex COSCO
$
582
COSCO Shipyard Group
$
44
COSCO Corp Singapore
Net cash
$
355
Value to SMM
355
Valuation/share
0.17
Shares outstanding (m)
2088
SOTP valuation (S$)
4.18
Source: OIR estimates
2
OCBC Investment Research
Singapore Equities
Company financial highlights
Income statement
Year Ended Dec 31 (S$m)
Revenue
Gross profit
Operating and admin expenses
EBITDA
Operating profit
Other expenses/income
Associates
Pre-tax profit
Profit for the year
Profit attributable to shareholders
Balance sheet
As at Dec 31 (S$m)
Cash and cash equivalents
Other current assets
Property, plant, and equipment
Total assets
Debt
Current liabilities excluding debt
Total liabilities
Shareholders equity
Total equity
Total equity and liabilities
Cash flow statement
Year Ended Dec 31 (S$m)
Op profit before working cap. changes
Working cap, taxes and int
Net cash from operations
Purchase of PP&E
Other investing flows
Investing cash flow
Financing cash flow
Net cash flow
Cash at beginning of year
Cash at end of year
Key rates & ratios
Earnings per share (S cents)
NTA per share (S cents)
Gross profit margin (%)
Net profit margin (%)
PER (x)
Price/NTA (x)
EV/EBITDA (x)
Dividend yield (%)
ROE (%)
Net gearing (%)
FY12
FY13
FY14F
FY15F
4,430.1
694.5
-140.3
644.8
554.2
19.2
56.3
629.6
567.4
538.4
5,525.9
707.8
-63.6
741.5
644.3
5.1
15.6
665.0
588.3
555.7
5,850.7
819.1
-133.0
830.7
686.1
-5.4
27.6
708.4
602.1
568.8
6,233.2
872.6
-132.5
943.3
740.1
-15.6
27.6
752.1
639.3
604.0
FY12
FY13
FY14F
FY15F
1,408.9
2,232.0
1,476.2
5,786.5
378.7
2,685.2
3,239.4
2,438.5
2,547.0
5,786.5
1,694.9
2,526.2
2,394.2
7,250.1
846.1
3,364.3
4,440.6
2,677.0
2,809.5
7,250.1
1,385.3
2,609.4
3,035.5
7,759.5
1,030.0
3,359.1
4,619.3
2,974.4
3,140.2
7,759.5
1,363.2
2,569.4
3,364.3
8,105.5
1,030.0
3,337.2
4,597.4
3,307.0
3,508.1
8,105.5
FY12
FY13
FY14F
FY15F
670.7
-463.1
207.5
-516.8
-9.9
-526.7
-231.9
-551.1
1,989.6
1,408.9
748.6
188.6
937.2
-814.9
17.2
-797.7
135.3
274.8
1,408.9
1,694.9
487.3
12.9
500.2
-800.0
88.9
-711.1
-87.6
-298.4
1,694.9
1,385.3
1,012.7
-72.1
940.6
-500.0
-191.2
-691.2
-271.4
-22.1
1,385.3
1,363.2
FY12
FY13
FY14F
FY15F
25.8
115.2
15.7
12.8
13.9
3.1
11.6
3.6
23.3
Net cash
26.6
126.8
12.8
10.6
13.5
2.8
10.1
3.6
22.0
Net cash
27.2
141.2
14.0
10.3
13.1
2.5
9.0
3.6
20.2
Net cash
28.9
157.1
14.0
10.3
12.4
2.3
7.9
3.6
19.3
Net cash
Sources: Company, OIR forecasts
Company financial highlights
OCBC Investment Research
Singapore Equities
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Important disclosures