SembMarine downgraded to Reduce by CGS-CIMB on forecasts losses will widen

CGS-CIMB downgraded Sembcorp Marine to Reduce from Add, saying it was “throwing in the towel for now.”

“SMM is likely to be plagued by the circular issues of weak orders and operating leverage, balance sheet constraints and competitive landscape,” the brokerage said in a note Tuesday.

Sembcorp Marine reported Tuesday a second quarter net loss of S$8.5 million due to accelerated depreciation, but that was narrower than the S$55.6 million loss posted in the year-ago period.

CGS-CIMB said it hadn’t expected the loss, and it noted SembMarine has guided for losses to widen in the second half of  the year, implying more than S$30 million in losses per quarter.

“Simplistically put, SMM had expected orders to come in but they did not, due to tender cancellations and delays in final investment decisions,” the brokerage said, pointing to a lack of large orders since May 2018.

Even if SembMarine sees orders in the second half of this year, “damage” from weak orders since the second half of 2018 will likely continue through the first quarter of 2020, the brokerage said.

“Even if SMM wins a S$2 billion order today, it would take at least nine months to see meaningful profit recognition post engineering and procurement stages. Therefore, we think the market is unlikely to get excited over order wins,” until the order momentum becomes sustainable or the company shows consistent quarterly earnings improvement, the note said.

CGS-CIMB slashed its earnings forecasts and now estimates a loss of S$71 million for 2019 and a loss of S$500,000 for 2020. It also cut its target price to S$1.16 from S$1.75, based on 1.1 times price-to-book.

“We think the current share price may not have factored in a zero order scenario for the second half of 2019,” the brokerage said. It noted the stock traded as low as 1.05 times price-to-book in 2016, when orders were anemic.

The share price is also likely to be weighed by any negative newsflow from Brazil’s ongoing investigation of SembMarine’s subsidiary there, CGS-CIMB said.

Shares of SembMarine were down 1.47 percent at S$1.34 at 3:13 P.M. SGT.

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