Brokers' take

Sembcorp Marine (SMM) | Add Oct 18 close: S$1.85 Target price: S$2.52 CGS-CIMB, Oct 18

We concur with management that the offshore newbuild sector has commenced a recovery, but is in the initial stages. We think this is similar to the early cycle seen in 2003-2004 when the utilisation of rigs in demand was about 70 per cent. Discussions on the Gravifloat project continues, but there is no clarity on the timeline. Therefore, we think SMM may not meet our S$2 billion, and market's S$2 billion to S$3 billion order target for 2018. Instead, we think S$1 billion to S$1.5 billion could be more realistic. On a S$1 billion order assumption for 2018, our earnings for FY19F-20F could be reduced by 6 per cent per annum. We are leaving our numbers unchanged for now. Year-to-date, SMM has only clinched S$730 million of orders.

Management expects better FY19 for orders, balance sheet and margin. SMM has delivered eight out of nine Borr Drilling rigs, with final payment pending successful charter of the rigs by next year. With the deferred payment, interest income will rise in H2 2018. Interest income for the first half this year was S$19 million (+85 per cent y-o-y). Balance sheet is also set to improve by Q4 with US$150 million final payment for West Rigel semi-sub.