Just when you thought things couldn&rsquo t get any worse at SembMarine...

Gwyneth Yeo

 

SINGAPORE (Oct 26): Sembcorp Marine&rsquo s announcement that it had sunk to a net loss of $21.8 million in 3Q while 9-month earnings of $44.5 million made up just 25% of consensus full-year earnings came as a surprise for market watchers already expecting a poor set of results.

To recap, SembMarine&rsquo s 3Q was hit by $18.8 million in forex losses and $27.7 million of associate losses from Cosco Corp. Maybank Kim Eng analyst Yeak Chee Keong notes that excluding the forex loss, operating profit would have come in at $51.8 million, barely meeting expectations.

While Yeak has cut earnings forecasts for FY16 to FY18 by between 29% and 43% to account for forex losses, he is more worried about SembMarine&rsquo s poor sales orders. As of end Sept, the group&rsquo s order intake was $320 million and with no new orders in 4Q. That&rsquo s way below Yeak&rsquo s $1.6 billion forecast for FY16.

Yeak adds that the group&rsquo s outstanding orderbook of $5.2 billion - excluding orders from Sete Brasil - continues to be dominated by the Heerema contract, the EPC contract for Maersk Oil, and two Transocean drillships. &ldquo We believe operating margins for the first two will be lower than the traditional 10% to 12% for rigbuilding contracts,&rdquo says Yeak.

But CIMB analyst Lim Siew Kee was more concerned about the problems at SembMarine&rsquo s associate Cosco Corp, which has seen order cancellations, delivery delays, higher construction costs and provisions. Lim notes that SembMarine has made an additional $3.8 million provision for Cosco on top of the $8.4 million impairment made in 2Q.

&ldquo There is no clear strategy articulated on its stake in Cosco Shipyard Group or Cosco Corp but we believe the group restructuring at the China Cosco Shipping Corporation level may complicate any divestment possibility,&rdquo writes Lim.

In addition, Lim remains sceptical of SembMarine&rsquo s $280 million provisions for its Perisai, Oro Negro and North Atlantic drilling rigs, which management had said was adequate to account for deferments and possible cancellations.

As such, CIMB has cut its earnings forecast for FY16 to FY18 by 18% to 32%, from associate losses and worsening margins, and also does not &ldquo rule out the possibility of a cash call if SMM continues to be crippled by weak orders and difficulties in disposing of its risky rigs by 2017&rdquo .

Still, most analysts agree that the single positive piece of news from SembMarine&rsquo s results is its improvement operating cashflow of $796 million. That followed final receipts from the Noble jackup of $358 million and from the Denorske platform of $358 million. &ldquo This helped lower net gearing from 1.1x in 2Q16 to 1.0x,&rdquo says Maybank&rsquo s Yeak.

And RHB believes there is a bright spot in SembMarine&rsquo s business -- its floating non-drilling solutions. As the research house explains, floating and offshore solutions offer &ldquo much more resilient demand&rdquo as they are mainly used for the production value chain, and not the exploration value chain.

&ldquo Currently, the company has seven floater projects in various stages of completion, while it has two offshore platforms to be delivered in the next two years,&rdquo says RHB.

Maybank Kim has a &ldquo sell&rdquo with unchanged $1 target while CIMB has a &ldquo reduce&rdquo with 90 cents target. RHB has a &ldquo neutral&rdquo and $1.33 target.

Shares in SembMarine closed 4 cents lower at $1.28.