Sembcorp Marine needs $1b-2b annual contracts to stay afloat

The only good news is earnings are stabilising after its $22m loss in 3Q16.

Excluding associates losses, Sembcorp Marine (SMM)'s core earnings are stabilising at an average of S$30m per quarter. But to maintain earnings at this level, UOBKayHian ballparks that at least S$1b-2b of contract wins are required for SMM.

According to the research house, associate losses from Cosco Shipyard Group (CSG) are expected to continue, and it foresees no turnaround for them. However, excluding its debilitating effects, SMM’s earnings appear to be stabilising, provided it is able to maintain a certain level of contract wins going forward.

SMM reported a loss of S$22m for 3Q16, below expectations. The quarterly loss was largely due to associate CSG and forex losses.

Excluding these, SMM reported a profit from its core business, albeit lower by 50% yoy.

"As SMM continues to deliver on its projects, the inflow of cash should improve its balance sheet. Core earnings are bottoming out, though the lack of contract wins is a key risk," said UOBKayHian.

According to UOBKayHian, SMM's majority of net orderbook are on progressive payment terms. Of its S$8.4b orderbook(Sete Brasil included), less than 20% of them comprise drilling rigs with back-ended payment terms.

Excluding the Sete Brasil and drilling rig orders, most, if not all of SMM’s projects going forward are on progressive payment terms. As such, working capital requirements have likely peaked, and UOBKayHian envisions steady cashflow going forward.

"Barring any unforeseen circumstances, SMM’s balance sheet is on the mend. With capex tapering off in 2017, progressive payments on its existing orderbook and a highly cash generative repair business," it said.

UOBKayHian expects net gearing to decline to around ~90%. This is predicated that at least S$1+b in contract wins can be secured per year. Rising oil price going into 2017 favors the outlook that this can be achieved, it said.