Sembmarine losses may bleed into Q1 2019

The underperforming offshore engineering unit continues to weigh on margins.

A quick turnaround is unlikely to take place for Sembcorp Marine as its losses are likely to extend at least into the first quarter of 2019, according to UOB Kay Hian.

Sembcorp Marine has sunk in a protracted earnings rut after net profits in Q3 crashed to $29.76m amidst a loss upon the sale of a semi-submersible and dismal business volume. The company also booked a $55.62m loss in the preceding quarter.

The rig builder itself forecasts business volume to remain dismal in the near-term as it expects to continue bleeding ‘for the foreseeable quarter,’ it said in a statement.

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Sembmarine also failed to nab any contract or variation order in Q3 with 9M18 contract wins holding steady at $730m, observed UOB analyst Foo Zhi Wei. With the addition of the recent US$166m contact win from Varg in October, YTD contract wins stand at about $1b.

Net gearing also surged from 126% in Q2 to 140% in Q3 which could slow down the company’s turnaround despite an expected boost from the partial receipt of cash proceeds from the delivery of West Rigel.

“[S]MM’s high net gearing could be a possible impediment to securing more contracts. Potential clients do take into consideration the shipyard’s balance sheet strength when selecting yards,” noted Foo.

As such, Sembmarine’s losses are likely to continue into the next year at least as the company’s current orderbook may prove insufficient to absorb expenses as the offshore engineering unit continues to underperform.

“By our estimates, assuming a revenue run rate of $800m-900m going forward, the offshore engineering’s operating margin has to improve to 2-3% before a profit can be seen. This also assumes that net interest expense continues to fall. Judging by the offshore engineering’s 3Q18 operating margin, it is probable that the current orderbook remains insufficient to cover overheads,” added Foo.