Sembmarine risks sinking in 2018 despite new orders

It still has to work through the 2016-2017 orders that were secured at lower-than-average EBIT margins.

Sembcorp Marine (Sembmarine) has yet to recover from rocky waters even if its net order book has grown to $4.59b from $4.45b in 2017.

UOB Kay Hian analyst Foo Zhi Wei noted that the order valuations not supportive of current financial performance. "Valuations remain stretched in our view. Sembmarine continues to be a play on the order book recovery from higher oil prices. Even if new orders continue to be secured at average historical EBIT margins, it will take at least a year before these orders kick in," he said.

The company's order book was higher due to the award of the TechnipFMC FPSO hull and living quarter contract secured in March 2018. Deliveries are expected to stretch into 2020.

He added that Sembmarine’s profitability is still challenged as they worked through the 2016-2017 orders that were secured at lower-than-average EBIT margins. "Continued operational losses will erode the book value per share, directly translating to valuations falling over time. The balance sheet is slowly improving, but the continued high gearing does not warrant a price-to-book (P/B) revaluation to the historical mean,"

CGS-CIMB analyst Lim Siew Khee also noted that for the first time, management guides for the possibility of negative operating profit in the next few quarters if there are no orders ahead, due to weak operating leverage. "We think this trend will reverse depending on the timing of sizeable orders and recognition of the recently secured TechnipFMC hull living quarters order. Settlement of variation orders could also reverse EBIT losses. Conservatively, we now expect EBIT losses in FY2018," she said.

OCBC Investment Research analyst Low Pei Han, however, is confident that the company will be able to weather these conditions. "Sembmarine is the only large cap oil and gas pure play in the Singapore space and hence a likely favourite for investors wishing to gain exposure to rising oil prices. Its share price has been sensitive to oil price movements but at current price levels, we think most of the positives have been priced in – we are expecting new orders of $3b this year and next, which we believe is similar to consensus," she said.

"Even with estimates of $4b or more, this still does not justify higher P/B valuations," she added.

Sembmarine's profits sank 85.7% from $37.04m to a mere $5.32m. However, its turnover jumped 58.3% to $1.18b. Lower profit was caused by the one-off gain on disposal of Cosco Shipyard Co., Ltd recorded in 1Q2017. Moreover, there were lower contributions from the offshore platforms, offset by higher profit recognition on rigs delivery in 1Q 2018 on the adoption of SFRS(I) 15.