UOB KayHian still cautious on SembMarine despite surprise profit

Singapore two-dollar billsSingapore two-dollar bills

Though Sembcorp Marine reported a surprise net profit last week, beating expectations for a loss, UOB KayHian said it remained cautious of any rally in the stock.

The brokerage noted the stock has rallied on the earlier-than-expected turnaround, adding it might even rally further on its beaten-down valuations. But it didn’t raise its target price.

“Despite the brightening earnings outlook, we remain cautious due to the tight balance sheet against a backdrop of rising working capital requirements and elevated capex spend,” UOB KayHian said in a note last week.

“Critical to SMM’s profitability is the sustainability of new contract wins. A chicken-and-egg situation exists where SMM needs to secure a higher volume of new orders to grow profits, cash flow and de-lever. Yet, its elevated gearing may disadvantage it from winning orders necessary to achieve that outcome,” it added.

UOB KayHian kept a Hold call with a S$1.83 target price and a S$1.65 entry price. It also upgraded its earnings forecasts for 2019 and 2020, expecting net profit of S$48 million and S$50 million, respectively.

The stock ended Friday up 3.53 percent at S$1.76.

Wednesday, Sembcorp Marine reported its fourth quarter net profit dropped 94.9 to S$5.93 million, amid a turnaround in the offshore engineering business. The company attributed the profit drop to continued low overall business volume, impairment of marine vessel and accelerated depreciation costs, partly offset by higher margin recognition from newly obtained floater projects and write-backs of provisions for completed projects.

Get the Shenton Wire morning briefing in your inbox