The Street remains overly optimistic that Singapore’s rigbuilders will see a quick earnings recovery from an improvement in new orders, Daiwa said, sticking with a Neutral call on the sector even as other analysts were turning more positive.
”While the Street seems increasingly upbeat that our local yards will clinch a number of mega orders in 2018, we are less sanguine over the earnings potential of turnkey production-related projects, over which our Singapore yards have less of an advantage than the Korean yards in terms of newbuild experience,” it said.
“The rise in new orders is unlikely to significantly alter the weak operating landscape for our Singapore rigbuilders, particularly in the case of SembMarine,” the bank said in a note on Tuesday, noting that fourth-quarter earnings were “dismal.”
Downbeat on SembMarine
For Sembcorp Marine, Daiwa was particularly downbeat.
“SembMarine, in particular, is bidding aggressively for EPC production assets despite lacking the necessary track record and experience, where the low project margins could come as a negative surprise for future earnings,” it said. “Keppel, on the other hand, is not likely to go after these turnkey projects due in part to facility limitations.”
It noted that the Street’s 2018 earnings forecasts for SembMarine imply an adjusted gross margin of around 10.5 percent, which was only justifiable with revenue generation of S$4.5 billion, based on the bank’s forecasts. That compared with consensus core revenue forecasts of S$2.2 billion, adjusted for zero margin projects.
”We estimate potential project margin pressure due to the competitive landscape, coupled with the 50 percent increase in steel prices since the start of 2016 (which yards do not have the ability to pass through) will result in core losses for SembMarine even with revenue about S$3 billion,” it said.
Daiwa advises long Keppel, short SembMarine
It raised its 2018-19 revenue forecasts for SembMarine by 10-42 percent, but said it expected the company to remain money-losing in 2018. It cut its 2019 earnings forecast by 54 percent to S$51 million, compared with the consensus forecast of S$116 million. Daiwa noted that it was the only analyst with a core earnings loss forecast for SembMarine.
It kept SembMarine at Hold, tweaking its target to S$1.83 from S$1.86. But it upgraded Keppel to Buy from Outperform, with an unchanged target of S$9.12, citing the stock’s recent fall.
Daiwa advised a long Keppel, short SembMarine trade.