1H22: A Loss For 1H22 But Financials Should Materially Strengthen In 2H22
SMM reported a loss of S$143m which was a material improvement from the S$1.2b loss in 1H21. Project completions and work on new orders should lead to material financial improvement in 2H22. New order wins to date of S$1.9b has been impressive and we expect more in the near term. Maintain BUY. Target price: S$0.156.
• Loss for 1H22 but financials should strengthen in 2H22. Sembcorp Marine (SMM) reported a 1H22 loss of S$143m which was significantly better than the S$1.2b loss in 1H21. We assess the results as being largely in line with our expectations. Although 1H22 revenue was strong, rising 38% yoy to S$1.1b, we believe that the company’s financials will witness sequential strength in 2H22 given its higher order wins ytd. As the new orders move from their initial engineering work towards execution of fabrication and construction work, SMM should see improved revenue and profit recognition. In addition, we highlight that the company is on track to deliver Transocean’s Deepwater Titan which would then enable it to collect $350m in revenue in 2H22. Importantly, the company stated that there are no significant delays for current and new projects.
• New order wins in 1H22 bode well. SMM disclosed that ytd order wins total S$1.9b with around S$300m of this being repair and upgrading works. Given that order wins for the wind turbine installation vessel and Brazilian Navy total S$850m, it would imply that the recent order win for gas topsides from an oil major is worth around S$750m. During the analyst briefing, SMM’s management stated that it was unable to disclose any details on neither the project nor the client at present. The company’s current net orderbook is >S$2.5b.
• Revenue growth in 1H22 was driven by floaters and rigs, offsetting weakness from offshore platforms and specialised shipbuilding (see table on RHS). In the floaters segment, SMM delivered two newbuild Floating Production Storage and Offloading (FPSO) vessels Equinor and Technip in 1H22 while in the rigs segment, it delivered Transocean’s Deepwater Atlas. During the analyst call, management guided for much stronger revenue recognition in 2H22 as it completes several key projects.
• Manpower less of an issue at present. While manpower levels have not returned to pre COVID-19 levels, mainly as a result of relatively lower work volume levels, SMM noted that has started to recruit more manpower given its recent new order wins. At present, it is engaged in initial engineering works but once it starts construction and fabrication works, the shipyard will need to review the types of skillset that it needs and replenish its workers.
• A reduction in COVID-19 challenges. While SMM suffered from various COVID-19-related challenges in 2021, these supply chain issues and labour movement restrictions at its shipyard are very much in the past. Going forward, it should see a less onerous business environment. While inflation has been a general concern for many businesses, with input costs such as steel and copper seeing higher prices on a yoy basis, SMM stated that its customers have been able to absorb such higher costs.
• Repairs & upgrading segment. SMM stated that this part of the market has seen an overall sequential improvement in volume of activity, not just for itself but for the entire industry. The company noted that its repairs & upgrades performance in 1Q22 was weaker on a yoy basis as customers could not berth their vessels in Singapore given COVID-19 restrictions. However, given that such restrictions have been lifted from 2Q22 onwards, it thus expects sequential improvement in 2H22. Of note in the upgrading sub-segment is the overall macro environment for natural gas which continues to be very significant as a fuel in the energy transition away from oil and coal. Gas prices have also been extremely bullish because of the Russian invasion of Ukraine and thus upgrading business volume in the LNG carrier space which appears very strong in the near to medium term.
• No changes to earnings estimates.
• Maintain BUY with S$0.156 target price. 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 order thus leading 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 given the lack of spending by the global oil and gas industry, thus constraining 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. On 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 doubling again in 2023 to 7.3GW.
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• New orders for rigs, offshore renewable installations or fabrication works as well as repairs and upgrade works for cruise ships and other commercial vessels.