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Analysts: Sell Sembcorp Marine Now; Weak 2015
Aspire, Hot Picks | 05 May 2015
By: Vance Wong
Articles (74) Profile

Analysts' updates on Sembcorp Marine LTD as at 04/05/2015

Analysts from various research houses have mostly reflected in their recent updates that SembCorp Marine (SMM) will face a tough FY15 ahead. This is largely due to SMM’s 1Q15 net profit of approximately $160 million (-13.6 percent Year-on-Year (YoY); -39.2% Quarter-on-Quarter (QoQ)) achieving only 20 percent of the average street estimates.

Diminishing Ship-Repair Revenue

Segmental breakdown-ship repair value per vessel at record low

The biggest contributing factor to their underperformance was ship-repair revenue, which decreased almost 40 percent YoY to barely $100 million. According to SMM’s FY14 report, ship-repair revenue contributes about 11 percent to its total operating revenue.

CIMB thinks that the reason for the “weakness was due to the timing of repair jobs, weak shipping market in which customers are preserving cash flow, as well as stiff competition from regional yards.”

SMM’s profits took another hit from their recent forex loss of about $10.9 million, according to DBS Vickers.

Weak Order Flows

SMM's Order Book

In MayBank Kim Eng’s report, analysts pointed out that Year-To-Date (YTD) orders only recorded an extra $56 million added to its existing $10.6 billion on SMM’s net order book, down from $11.4 billion in 4Q14.

Although SMM has reflected that it has a “sizeable Letter-of-Intent (LOI) for a semisub crane vessel” worth about $700 million to $1 billion, it would need at least a few months to materialise. MBKE maintains its stand that FY15 order flow will not meet expectations, cutting its estimate of order wins to $2.7 billion, down from the previous $3.6 billion.

Increased Debts

In CIMB’s report, SMM’s net debt is shown to have increased from $668 million in December 2014, to $908 million at the end of 1Q15. This is essentially because “more loans were taken to fund working capital and Capital Expenditures (CAPEX).”

CIMB believes that SMM’s net debt will most probably remain high. UOB Kian Hian points out that over the past two quarters, Sete Brasil, a major contributor to SMM’s revenue had doubled its late payments to the latter. Late payments attributable to Sete Brasil amounted to US$160 million ($211.5 million).

Furthermore, as other major customers of SMM like Oro Negro and Hercules Offshore are tight on finances, KGI Fraser thinks that there might be order cancellations.

Macquarie: Sete Brazil’s Payment Key to SMM

While all the other research houses were pessimistic about SMM’s outlook for FY15, Macquarie Research (MER) thinks otherwise. MER has adopted a more contrarian view, and  points out that SMM has about $4.5 billion worth of outstanding payments from Sete Brazil.

Furthermore, MER states that although rig orders are very lacklustre, “large fixed platform orders will be key” to SMM’s inflow of orders. However, they did not mention about more possible order cancellations in the midst of a general pullback in capital expenditures.

General Outlook for SMM: Bleak

Analysts chart of Sembcorp Marine LTD; Source: FactSet Fundamentals

Analysts pointed out that oil prices might rebound and would increase the revenue of the general Offshore & Marine (O&M) sector in the coming quarters. However, SMM faces stiff competition from peers like Keppel Offshore & Marine and SCI Marine Inc.

Furthermore, if oil prices do not rebound but decrease further, SMM’s order flow might face further cuts. As such, the general sentiment of research houses is rather negative towards SMM’s outlook for FY15 and even the following years.

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

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