Deutsche Bank Markets Research Rating

Company

Sell

Sembcorp Marine Alert

Asia

Date

29 July 2015

Results

Singapore Transportation

Marine

Reuters SCMN.SI

Bloomberg SMM SP

ADR Ticker SMBMY

ISIN US81662J1079

Exchange Ticker SES SCMN

Cloudy prospects and risk of further contract pushouts; weak 2QFY15 1H15 net income down 15% to S$215m SMM’s 1H15 sales were down 6% to S$2.5bn, while PATMI declined 15% YoY to S$215m (about 44% of our FY15 estimate and 43% of consensus). EBIT margin was flat at 11.4% in 1H15 (11.3% in 1H14). 1H15 ship repair sales declined 14% yoy to S$266m due largely to lower average revenues per vessel. Net gearing in 1H15 rose to 0.54x from 0.22x at the end of FY14. 1H15 receivables increased to S$902m (S$469m at the end of FY14) but S$380m was subsequently received on 1 July 2015. YTD, SMM has secured new orders worth S$1.35bn (our FY15E is S$1.7bn). As competition intensifies, industry margins for new contracts should be on a decline. SMM’s net order book as at 1Q15 was S$10.9bn (FY14 was S$11.4bn). We maintain our below consensus estimates in light of uncertainties in Brazil, risk of further contract pushouts (SMM is currently negotiating with a few customers on this issue) and challenging O&M prospects. We have lowered our earnings estimates by 710% in light of the continued industry challenges; our 15E, 16E and 17E net income estimates are 9%, 24% and 41% below the Street, respectively. SMM’s valuations appear rich, in our view; maintaining Sell. Tough times in O&M We see prospects as challenging for SMM as the oil industry remains in a cost cutting mode, the offshore rig market is oversupplied, and the group is exposed to country specific risks (e.g. Brazil). The overall industry is in an adjustment phase and requires more time as costs are pressured down, rig attrition rises, M&A activities accelerate, and/or weaker companies exit. Recently, the market was surprised when ConocoPhillips terminated a threeyear contract for a brand new drillship with Ensco. ConocoPhillips is obligated to pay Ensco termination fees monthly for two years equal to the day rate of about US$550,000. That ConocoPhillips is willing to terminate the contract knowing the sizeable penalties involved may raise concerns over its views on how long this downturn may last. Our US oil services team recently highlighted that the key problem for offshore drillers is the vast over-supply of rigs. They noted that fixtures have picked up from a record low in 1Q15 but leading edge day rates continue to soften as the number of available rigs increase. Retirements of floaters have been solid but well below the number of un-contracted newbuilds and rigs rolling-off contract. They note that newbuild deliveries continue to be pushed to the right and for now, it now appears 2016 will be the peak supply year. About half of the floaters on order have contracts and less than 10% of the newbuild jack-ups are contracted and as long as this overhang persists, day rates will remain weak.

Price at 29 Jul 2015 (SGD)

2.71

Price target - 12mth (SGD)

2.30

52-week range (SGD)

4.14 - 2.71

Straits Times Index

3,281

Kevin Chong Research Analyst (+65) 6423 5549 [email protected] Key changes Price target

2.50 to 2.30 ↓

-8.0%

Source: Deutsche Bank

Stock data Market cap (SGDm)

5,659

Market cap (USDm)

4,144

Shares outstanding (m)

2,088.1

Major shareholders

Sembcorp Industries (60.84%) 39

Free float (%) Avg daily value traded (USDm)

4.1

Source: Deutsche Bank

Key data FYE 12/31

2014A

2015E

2016E

Sales (SGDm)

5,833

5,422

4,744

Net Profit (SGDm) DB EPS (SGD)

560.1

457.9

363.3

0.27

0.22

0.17

14.4

12.4

15.6

3.4

4.0

3.2

PER (x) Yield (net) (%) Source: Deutsche Bank

Figure 1: Earnings change table S$m New PATMI

FY15E 458

FY16E 363

FY17E 267

Old PATMI Change

490 -6.6%

395 -8.0%

297 -10.1%

Source: Deutsche Bank

________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong The views expressed above accurately reflect the personal views of the authors about the subject companies and its(their) securities. The authors have not and will not receive any compensation for providing a specific recommendation or view. Deutsche Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. FOR OTHER IMPORTANT DISCLOSURES PLEASE VISIT http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=SCMN.SI MCI (P) 124/04/2015.