Positive Guidance For 1H22 Results And Better Order Visibility
SMM’s 1Q22 business update was reasonably bullish with management commenting
that 1H22 results should be significantly better yoy. In addition, it expects new order
wins to come through given that both conventional energy and renewables are
bolstered by strong industry tailwinds. SMM’s robust rate of deliveries in 1Q22 has led
to a material improvement in its balance sheet, with its net debt/equity declining to
0.38x at end-1Q22 from 0.49x at end-4Q21. Maintain BUY. Target price: S$0.156.
WHAT’S NEW
• A strong qualitative update. Sembcorp Marine (SMM) issued a 1Q22 business update
which, while lacking in revenue or profit numbers, contained bullish comments around
potential order wins and better yoy results for 1H22 (likely at end-Jul 22). In our view, the
tone of the comments are the most positive that we have seen from management in the past
three years.
• Executing its current orderbook well. Out of the 17 projects that it is currently working on,
SMM is slated to deliver 12 of these in 2022; however with six of these already delivered to
its clients (see table below), we should expect better operating cash flow and a meaningful
narrowing of losses vs 1H21. Indeed in its announcement, the company guided for 1H22
results to be “significantly better” yoy. SMM highlighted that as at end-1Q22, its net
debt/equity had improved to 0.38x compared to 0.49x just three months ago in end-21.
• Orderbook update. In 1Q22, SMM disclosed that it had won various repairs and upgrades
contracts, including three vessels for the US Navy as well as nine containerships from
Maersk. As at end 1Q22, SMM had a net orderbook of S$1.75b (which includes repairs and
upgrades contracts).
STOCK IMPACT
• Muted inflationary impact thus far. On the analyst call, SMM stated that a number of its
projects are close to completion and thus with all the necessary equipment and material
having been purchased much earlier, there is no inflationary impact. In the meantime, its
other projects that are about to start have included appropriate escalation clauses within the
contracts to take into account inflation. For new tenders, those contracts should allow for
inflation adjustments and will be looked at closely by the company to ensure that cost
increases are passed onto the customer.
• Orderbook outlook. SMM reiterated its belief that the industry outlook for the offshore
marine sector has improved markedly in the past six months and thus it is seeing increased
order visibility from this year onwards. Some of the broad areas that the company will focus
on are jack-up and floating versions of Wind Turbine Installation Vessels, offshore assets to
cater to carbon capture, oil and gas production platforms, and various conversion works
including FPSOs, FLNGs as well as conversion works from offshore drilling to wind turbine
assets. Given the global push towards alternative (ie non-fossil fuel) sources of energy, we
should witness increased demand for renewables and thus construction in this area should
increase. Interestingly, SMM noted that it is in initial discussions for drilling rigs; however
instead of using the traditional drilling system, the new design will have a significantly lower
carbon footprint with a higher level of electrification of the whole platform.
• Repairs and upgrading business. Management stated that the overall repairs and
upgrading business has returned to a much firmer footing vs the year ago period and it has
seen a higher level of enquiries across the board. It expects that as higher levels of
economic activity return, there should be a similar increase in demand for repairs and
upgrades with key vessels being LNG carriers, bulk carriers, naval vessels, offshore support
vessels and rigs being the likely customers for repairs. On the upgrading front, SMM stated
that demand remains strong with ballast water cleaning and pollution controls being the key
items for its clients.
EARNINGS REVISION/RISK
• None.
VALUATION/RECOMMENDATION
• Maintain BUY with target price of S$0.156. With the SMM/Keppel merger terms largely in
place and the uncertainty out of the way, the focus on SMM will be to garner new orders in
2022 and add to its orderbook. Our target book-value multiple for SMM of 1.2x reflects our
confidence that it will garner such orders, which will lead to positive share price
performance.
• We expect higher rates of capex spending in both conventional offshore energy and
renewables. In our view, the offshore construction cycle for both conventional oil and gas
and renewables has room for growth in the next few years, especially since the lack of
spending by the global oil and gas industry will constrain energy supply. In addition the war
in Ukraine appears to have led to a re-focus by majors such as BP, Eni, Equinor, Shell,
ExxonMobil and Equinor towards further investment in offshore Africa. For the offshore wind
sector, Europe continues to add capacity and is projected by Rystad to add 4.2GW in
capacity in 2022 and then almost double again in 2023 to 7.3GW.
SHARE PRICE CATALYST
• New orders for rigs, offshore renewable installations or fabrication works as well as repairs
and upgrades work for cruise ships and other commercial vessels.