SembMarine stock tumbles, and Daiwa warns it could fall further ahead

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Sembcorp Marine shares tumbled 5.7 percent to S$2.48 by 10:24 A.M. SGT on Thursday after its earnings disappointed, but at least one analyst said the company’s fundamentals were more worrying than just the profit miss.

Parent Sembcorp Industries saw its shares shed 1.77 percent to S$3.33 by 10:24 A.M. SGT.

Daiwa said in a note on Wednesday that SembMarine’s fourth-quarter results were a non-event. The rig builder said in an earnings release after the market close on Wednesday that it had a fourth-quarter net loss of S$33.8 million.

“While losses in this current quarter did not come as a major surprise, the market’s attention is predominantly focused on the corporate action front, with its parent Sembcorp Industries set to announce the conclusion of its year-long strategic review this Friday,” Daiwa said.

The market will be watching for some form of corporate exercise from parent Sembcorp Industries, which could range from privatizing SembMarine, divesting it entirely, reducing its stake or a dividend in specie.

Daiwa also expressed concern about outlook, despite management’s positive view for new order wins this year.

The bank estimates around S$3 billion in new orders for 2018, but it added the new projects could be low margin or money-losing as they are heavy on production-related Engineering, Procurement and Construction (EPC) works.

’Low-margin projects’

“For SembMarine, taking on these jobs would entail placing extremely aggressive bids coupled with a steep learning curve, raising questions on the profitability of the projects, in our view,” it said.

Daiwa said that the 2017 new order wins of S$2.735 billion, while a significant improvement from 2016’s S$320 million, would not necessarily add much to profit, as management had guided that S$1.77 billion of the orders were zero-margin in nature.

“We see the street’s overly high expectations for strong earnings improvement on the back of new order wins momentum picking up as likely misplaced, given that these new orders could be loss-making, in our view,” Daiwa said. “Hence, we view the counter’s strong share price performance since the start of 2018 as fundamentally weak.”

It noted that SembMarine shares had been up more than 40 percent so far this year, compared with rival Keppel’s around 8 percent rise.

“SembMarine attributes its positive share price performance year-to-date to brokerage houses’ upgrades but we see the key driving force versus Keppel and international oil companies as likely the expectations for a major corporate action to be undertaken by Sembcorp Industries, the lack of which could result in a significant share price correction for SembMarine, in our view,” Daiwa said.

SembMarine’s shares may find support at the February 12 low of S$2.37.

Daiwa has a Hold call on the stock, but said it would reassess after Sembcorp Industries’ release on Friday.

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