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.

Wilmar International | Buy Oct 18 close: S$3.01 Target price: S$3.90 UOB Kay Hian, Oct 18

Wilmar is expected to release its third-quarter results on Nov 12. Q3 is expected to be another good quarter (+11 to +22 per cent q-o-q; +21 to +33 per cent y-o-y), supported by the oilseeds & grains, as well as palm & lauric oils divisions. However, earnings risk could come from the sugar segment, given the low sugar prices and the incorporation of Renuka Sugar. We expect Wilmar's Q3 core net profit to come in between US$390 million and US$430 million. For its palm and laurics division, we see better downstream margins from higher utilisation rate. Key drivers include higher sales volumes on the back of greater biodiesel sales in Indonesia, and increased exports.

2018 has been a tough year for the sugar segment given that sugar has been seeing a declining price trend despite higher sales volumes. Thus, we will not be too surprised if we see a significantly lower sugar PBT (profit before tax), or even a loss in Q3. However, the impact on PATAMI (profit after tax and minority interest) is expected to be marginal. In our current estimates, we are factoring breakeven for sugar in Q3. The recent recovery of sugar prices should be good for Wilmar's milling earnings in the coming financial year. There is also a potential listing of the group's China operations. As more details of its China operations are made available in the listing process, investors might see greater value in Wilmar.

Compiled by Rachel Mui

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