OFFSHORE and marine (O& M) giant Sembcorp Marine on Monday warned of record first-half-year losses of over S$500 million as a result of manpower and supply-constraint woes, taking analysts aback with its worse-than-expected guidance.

 

Spiralling costs over the next six to 18 months, mainly to do with manpower issues, have pushed the firm into tapping " non-traditional sources" of labour, which cost twice as much, given prevailing labour shortages. These cost overruns have hurt the pandemic-beaten firm and delayed most of its projects by at least 12 months.

 

The firm will make " full provisions" for the increased costs and said it expects losses over the six months to be in the region of FY2020' s full-year losses. Set to release its first-half results in a little over two weeks, Sembmarine had posted huge losses of S$583 million last year due to hefty impairments as the Covid-19 outbreak decimated demand for energy and triggered an oil crash.

 

While industry analysts had largely expected the firm to be steeped in red ink for the period, given the pandemic pains, the extent of the losses must be shocking. A Bloomberg consensus forecast had pegged Sembmarine' s losses at some S$160 million for FY2021.

 

Terence Chua of Phillip Securities remarked: " We were not entirely surprised... Nonetheless the size of the loss is significant.

 

" The losses incurred in H1 come from the ongoing disruptions from the fluid nature of the pandemic, which is difficult to reasonably assess. It is therefore not unreasonable to book these costs in H1. For H2, the losses could continue to remain elevated due to the continued spread of the Delta strain in the region, which continues to hamper the economic reopening plans of the world economy."

 

United First Partners' head of Asian research Justin Tang echoed this sentiment: " One could have reasonably expected this, given the ongoing pandemic. In fact, Sembmarine had already telegraphed this to the market during its recent rights announcement... (but) the losses are perhaps a little deeper than expected. The larger-than-expected provisioning appears to build in some buffer for the uncertainty ahead."

 

The firm said it has also been hit with " costly" recruitment costs to meet quarantine requirements in the home country and Singapore, and cited, for example, work re-scheduling and extra sub-contract work arising from project delays for the additional cost.

 

Revenue receipts have also been significantly impacted, it said.

 

Sembmarine' s stock reacted predictably. Already oversold by most accounts, the counter fell a further 1.6 per cent to 12.1 Singapore cents on Monday. In the year to date, the stock has fallen 16 per cent.

 

The firm, some 43 per cent owned by Singapore' s Temasek Holdings, has been preparing the market for bad news in recent months.

 

In an interim business update in May for the first quarter, it guided that losses could continue this year. Then last month, it issued two updates that operations continued to be hurt by the pandemic-led disruptions, and indicated that it would likely incur higher costs, given the manpower crunch.

 

That, plus supply-chain constraints, have delayed completions of projects, it warned.

 

" Based on the latest information available, the group has more visibility on the likely cost increases to complete the group' s ongoing projects in FY2021 and FY2022," said Sembmarine on Monday, when it disclosed the move to make full provisions.

 

Chong Ser Jing, portfolio manager and co-founder of Compounder Fund, said: " If I were an investor in Sembmarine, the bigger question is the company' s liquidity."

 

Project delays result in cash-flow woes, which could be dicey given that the firm has to spend considerably more on wages as a result of rising manpower cost. For that reason, Sembmarine' s recently announced cash call is no doubt a desperately needed lifeline.

 

Less than a month ago, the O& M firm said it plans to raise S$1.5 billion via a three-for-two rights issue at a significantly discounted price of S$0.08 per share. The offering is fully back-stopped - two thirds by Temasek and the rest by DBS.

 

This would mark the group' s second recapitalisation in a year. Last year, its S$2.1 billion rights issue raised S$600 million on a net basis (the other S$1.5 billion went to Sembcorp Industries, its former parent prior to a de-merger, to set off an outstanding loan owed by Sembmarine).

 

Sembmarine' s labour woes have not vastly improved since then.

 

Both Sembmarine and Keppel Corp said last month that they would begin talks to merge their mammoth O& M operations - a consolidation that has long been the subject of market speculation. If it does pan out, it will create a global O& M powerhouse.

 

Mr Tang remarked: " In light of the cash call and merger, tying up loose ends is opportune and allows the company to start on clean slate on its road to recovery."

 

Phillip Securities' Mr Chua expects Sembmarine to take at least two to three years to navigate out of the current crisis, and with the mega merger, to position itself for the future.

 

From the lens of the hammered stock price, Travis Lundy, an analyst at Quiddity Advisors, which publishes on SmartKarma, said: " Sembmarine is working through its problems. It (stock price) has fallen quite sharply. At a certain point, it will be the right price, and from then on, the shareholder outlook will no longer be bleak" .

Sembcorp Marine estimates losses for the six months ended June 30, 2021, to likely be in the region of the full-year losses incurred for FY2020, according to a profit guidance on Monday.

 

This comes as the offshore and marine player expect to incur additional costs arising from delays in project execution as a result of the pandemic. These additional costs are due to work rescheduling, extra sub-contract work, additional material usage and other staff turnover-related costs.

 

Thus, provisions will be made for the group' s H1 2021 results for the costs to be incurred to complete the projects over the next six to 18 months.

 

" These provisions will have a material adverse impact on the group' s H1 2021 results," Sembmarine added. Its results for the period are scheduled for release on July 29.

 

The group further guided that labour shortages, together with supply chain constraints, have resulted in further delays in the completion of these projects. On top of increased manpower and other related costs, revenue receipts were also significantly impacted. The group said it will make full provisions for these increased costs in its H1 2021 results.

 

Sembmarine on June 24 proposed an additional S$1.5 billion rights issue to shore up its financial position and accelerate its pivot towards clean energy. It also said it had inked a memorandum of understanding with Keppel Corp to explore a potential merger of Sembmarine and Keppel Offshore & Marine.