Equity Research 23 April 2020

Company update Low Pei Han, CFA Marine Equity Research | Industrials Rating HOLD (as at 23 April 2020) Last Close SGD 0.68 Fair Value SGD 0.75

Challenging outlook • Hit by oil price plunge Security information • Thinning order book Ticker SCMN.SI Market Cap (USD b) 1.0 • Waiting for news on any restructuring Daily turnov er (SGD m) 4.0 Investment thesis Free Float 99% Shares Outstanding (m) 2,090 Sembcorp Marine is one of the global leaders in rig Top Shareholder Temasek Holdings Pte. Ltd. 61.0% building, offshore platforms and specialized shipbuilding and repairs. Outlook is challenging with Price performance chart the low oil prices and further risks include 1) higher than 3.10 3,853 expected capex requirements and potentially a need to raise funds, 2) risks relating to Brazil, and 3) lower 2.42 3,433 than expected new order flows. Meanwhile, the 1.74 3,012 market is likely awaiting news on any potential restructuring of the local yards. 1.05 2,592 Investment summary 0.37 2,172 -0.31Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 1,751 • Hit by oil price plunge – Following our last report on 20 Feb 2020, “Trend of losses to continue”, the share SCMN.SI STRAITS TIMES/d price of Sembcorp Marine (SMM) has corrected by about 45% vs. the STI’s 21% fall, mainly because of the significant plunge in oil prices as OPEC+ did a Financial summary shock and awe and pursued a market share SGD m FY19 FY20F FY21F strategy. Rev enue 2,883 2,019 2,103 • Chances of being placed on watch-list – Recall that Gross profit -91.8 -40.4 -21.0 SMM’s FY19 net loss to S$137m, which was wider than PATMI -137.2 -74.0 -56.9 previously expected. The group also saw net loss of S$74m in FY18. According to SGX’s listing manual, Earnings per share (S cents) -6.6 -3.5 -2.7 should a company record pre-tax losses for the three DPS (S cents) 0.0 0.0 0.0 most recently completed consecutive financial years, and its average daily market cap is less than Key ratios S$40m over the last six months, it would be placed FY19 FY20F FY21F on a watch-list. Currently, the group’s market cap is way higher than S$40m, but the group has given Gross profit margin (%) -3.2 -2.0 -1.0 notice of three consecutive years of pre-tax losses. Net profit margin (%) -4.8 -3.7 -2.7 Indeed, this trend of losses is likely to continue. As Div idend yield (%) 0.0 0.0 0.0 mentioned in our earlier report, we are expecting Source: Refinitiv , Company, Internal estimates 2020 to continue to see losses for the group. Overall business volume remains low, and looking ahead this is likely to continue for all segments expect for repairs and upgrades (underpinned by IMO regulations that require installation of ballast water treatment systems and gas scrubbers). Challenges remain, in particular supply chain disruptions due to the COVID-19 virus

1 Equity Research 23 April 2020

outbreak, which could affect execution of projects. Competition remains intense for all business segments. • Thinning order book – The group last disclosed during its FY19 results that net order book stood at S$2.44b, which is about a year’s worth of revenue. Post the oil price plunge, we adjust our estimates lower and our fair value correspondingly dips to S$0.75 (based on 0.75x P/B).

Potential catalysts Investment risks • Rise in oil prices • Macroeconomic deterioration • Better-than-expected new order flows at decent • Fall in oil prices margins • Impairment of assets • Corporate restructuring at parent level; offer for • Minimal new order flows company by any parties Valuation analysis Price/Earnings Price/Book EV/EBITDA Dividend Yield (%) ROE (%) FY20F FY21F FY20F FY21F FY20F FY21F FY20F FY21F FY20F FY21F SEMBCORP MARINE LTD (SCMN.SI) N.A N.A 0.7 0.7 32.1 23.3 0.8 0.5 (3.5) (0.6) LTD (KPLM.SI) 12.3 10.9 0.9 0.9 15.6 15.1 3.9 4.2 7.0 7.7 SEMBCORP INDUSTRIES LTD (SCIL.SI) 7.4 6.3 0.4 0.4 9.3 8.8 3.3 3.7 5.4 6.0 Source: Refinitiv

Price/Book chart Dividend Yield chart 2.3 8.0 7.5 2.1 7.0 6.5 1.9 6.0 5.5 5.0 1.7 4.5 4.0 1.5 3.5 3.0 1.3 2.5 2.0 1.1 1.5 1.0 0.5 0.9 0.0 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 PB Avg +2SD Div Yld Avg +2SD +1SD -1SD -2SD +1SD -1SD -2SD Source: Refinitiv Source: Refinitiv

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Company overview (as of 31 December 2019)

Company description Sembcorp Marine provides innovative engineering solutions to the global offshore, marine and energy industries. Drawing upon more than 50 years of track record and an extensive network of facilities and expertise, the group focuses on four key capabilities, namely, Rigs & Floaters; Repairs & Upgrades; Offshore Platforms and Specialised Shipbuilding.

Under Rigs & Floaters, the group provides turnkey solutions for complex projects, such as FPSO, FDPSO, FSO, FPU, FLNG, FSRU, MOPU conversions and newbuilds. Other products include drillships, semi-submersibles (drilling, accommodation and well-intervention), jack-up rigs, TLP and SPAR constructions.

Under Offshore Platforms, the group undertakes complex projects such as integrated and process offshore platforms, wind-farm substations, and LNG modules.

The group also designs and builds high-performance specialized vessels such as accommodation and crane barges and LNG carriers.

Sembcorp Marine operates shipyards strategically located in Singapore, Indonesia, the United Kingdom and Brazil. Its customers include major oil companies, drilling contractors, shipping companies as well as owners and operators of floating production units.

FY19 Revenue breakdown FY19 Revenue breakdown By segment By geography Rigs & Floaters (71.8%) USA (29.0%)

Norway (23.0%) Repairs & Upgrades (21.0%)

France (12.0%)

Offshore Platforms (4.5%) Brazil (12.0%)

Other Activities (2.7%) Others (24.0%)

Source: Company, Internal estimates Source: Company, Internal estimates

Earnings per share Dividends per share EPS (S-cents) DPS (S-cents) 26.80 30.00 14.00 13.00

20.00 12.00 12.46 10.00 10.00 3.80 8.00 6.00 0.00 6.00

-10.00 -3.55 4.00 -6.57 2.50 2.00 2.00 -20.00 -13.90 0.00 0.00 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 0.00 FY2014 FY2015 FY2016 FY2017 FY2018 FY2018 Source: Company, Internal estimates Source: Company, Internal estimates

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Company financials Income Statement In Millions of SGD except Per Share FY2015 FY2016 FY2017 FY2018 FY2019 12 Months Ending 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 Revenue 4,968.1 3,544.8 3,034.8 4,887.9 2,882.6 - Cost of Rev enue 4,837.2 3,252.1 2,689.0 4,884.8 2,974.4 Gross Profit 130.9 292.8 345.8 3.1 -91.8 + Other Operating Income ------Operating Expenses 297.9 90.6 5.8 55.4 46.8 Operating Income or Losses -167.0 202.1 340.0 -52.3 -138.6 - Interest Expense 44.4 86.3 92.3 95.8 123.2 - Foreign Exchange Losses (Gains) ------Net Non-Operating Losses (Gains) 166.2 25.3 -33.2 -47.2 -84.9 Pretax Income -377.6 90.5 280.9 -100.9 -177.0 - Income Tax Expense (Benefit) -77.6 15.4 24.8 -22.5 -36.8 Income Before XO Items -300.0 75.2 256.1 -78.4 -140.2 - Extraordinary Loss Net of Tax ------Minority/Non Controlling Interests (Credits) -10.3 -3.6 -4.1 -4.2 -3.0 Net Income/Net Profit (Losses) -289.7 78.8 260.2 -74.1 -137.2 Net Inc Avail to Common Shareholders -289.7 78.8 260.2 -74.1 -137.2 Abnormal Losses (Gains) ------Tax Effect on Abnormal Items ------Normalized Income -289.1 96.6 210.4 -79.9 -136.5 Basic Earnings per Share -0.1 0.0 0.1 0.0 -0.1 Basic Weighted Av g Shares 2,088.7 2,089.2 2,089.5 2,088.4 2,089.0 Diluted EPS Before Abnormal Items -0.1 0.0 0.1 0.0 -0.1 Diluted EPS Before XO Items -0.1 0.0 0.1 0.0 -0.1 Diluted EPS -0.1 0.0 0.1 0.0 -0.1 Diluted Weighted Av g Shares 2,088.7 2,089.2 2,089.5 2,088.4 2,089.0 Profitability Ratios FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 12 Months Ending 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 Returns Return on Common Equity -10.58 3.11 10.41 -3.12 -6.12 Return on Assets -3.44 0.81 2.68 -0.86 -1.65 Return on Capital -2.57 -2.19 -2.10 -2.13 -2.08 Return on Inv ested Capital - -2.42 -2.65 - - Margins Operating Margin -3.36 5.70 11.20 -1.07 -4.81 Incremental Operating Margin -0.28 -1.70 1.96 -0.10 4.49 Pretax Margin -7.60 2.55 9.26 -2.06 -6.14 Income before XO Margin -5.83 2.22 8.57 -1.52 -4.76 Net Income Margin -5.83 2.22 8.57 -1.52 -4.76 Net Income to Common Margin -5.83 2.22 8.57 -1.52 -4.76 Additional Effectiv e Tax Rate - 16.97 8.84 - - Dv d Payout Ratio -43.26 66.30 16.06 0.00 - Sustainable Growth Rate -10.62 3.09 10.39 -3.12 - Credit Ratios FY2015 FY2016 FY2017 FY2018 FY2019 12 Months Ending 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 Total Debt/EBIT -22.47 18.23 13.35 -77.41 -35.18 Net Debt/EBIT -18.29 12.89 9.01 -62.08 -32.26 EBIT to Interest Expense -3.39 2.64 3.33 -0.57 -1.08 Long-Term Debt/Total Assets 26.79 29.64 33.51 37.00 38.22 Net Debt/Equity 1.16 1.16 1.15 1.48 1.99 Source: Refinitiv

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