June 4, 2019

Sembcorp Marine remains the only listed pure play in the Singapore offshore & marine sector that may experience a pick-up in activities. We expect its earnings base to increase significantly over 2019-2020, driven by savings in depreciation costs post yard consolidation, and a pick-up in orderbook replenishment. We value the stock at SGD1.99, based on FY20F P/BV of 1.8x, 1SD above its 5-year mean, on sector recovery.

We expect orderbook replenishment to increase to SGD2.5-3.7bn on expectation of improving upstream activities globally. In particular, for FPSO conversion job awards, the number of projects sanctioned surged, starting in 2019 and largely in countries like Brazil and Africa. We expect LNG ship repair jobs to remain aplenty, with 41 LNG ships expected to be repaired and upgraded in 2019 (according to lngworldshipping.com). Repair and upgrade job margins are typically higher than fabrication jobs, with EBIT margins at 9-10% (vs 2-4% for fabrication).

The group has taken SGD329m worth of provisions to account for the drillship contracts post the eruption of the Brazilian corruption scandal in 2015, and we believe that the provisions are sufficient based on current circumstances. Out of the seven drill ships contracted, we believe four have seen material work progress before the client stopped paying. In the event of any potential sale of the drill ships, write-backs of provisions would be a positive for the group

The group is left with two yards to be returned to the Singapore Government, with the bulk of operations to be directed to the integrated Tuas Boulevard Yard (TBY) and the group’s corporate headquarters is expected to move there by 1H19. While the group could be hit with SGD60m worth of accelerated depreciation for 15 months starting 4Q19, it will realise cost savings of SGD48m pa starting FY20.

The group has gone on an acquisition spree for intellectual properties pertaining to LNG-related technologies, including the USD39m acquisition of Sevan Marine in Sep 2018. We have not imputed job wins from LNG-related projects in our orderbook replenishment assumption. Any future announcements of major LNG contracts could potentially result in positive adjustments to our basecase earnings.  BUY with SGD1.99 TP, 43% upside. – RHB

Sembcorp Marine closed at: S$1.42