My view on SembMarine's Profit Guidance

As we know, Sembmarine issued a profit guidance for Q4 2015 stating that the quarter will likely see a net loss with the full year result affected accordingly.

I'm vested in SCI, naturally this becomes a concern for me. I did some quick research on SMM.

First ever net loss quarter for SMM

This would be a first ever net loss for SMM. A quick check on their quarterly showed that SMM has always registered a profit for each quarter.

I'm guessing a large part of this net loss is attributable to the reversal of profits pertaining to Marco Polo (either on a prudent basis or with consultation with their auditors on the accounting treatment).

SMM closed $2.06 and is heading for trouble

Looks like SMM will definitely open below $2 on Wednesday morning (3 December 2015) and possible heading to the $1.60-1.80 range. 

"I will buy it when it hits the price levels of 2008!"

I won't be so quick to say that (even if I'm interested in an all-marine counter). This time round, it's different.

I've mentioned previously that SMM actually registered healthy profits since being listed (including the 2008/09 period). We must always remember to look back at the fundamentals.

Oils prices were trading around $40 but quickly recovered to above $80 and later $100 as there was the Iraq war and Libyan uprising. 

Now, however, oil prices are depressed due to oversupply and low demand. Sanctions for Iran was lifted and more oil will be pouring in the market. Shale oil is producing more oil than it was during 2008. Demand is slowing due to the China. I could go on and on, but my point is, there situation is quite different now from 2008.

Just because 2008 was the lowest price for SMM doesn't mean it can't go lower.

My take on the whole Marco Polo saga

SMM has been in the rig building business for so long and it earns a good reputation. As with any engineering work, there'll always been "defects" and imperfections. It'll be inconceivable to think that SMM's work is so "bad" that it'll affect the main function of the rig. If you nit pick, you'll bound to find something. If Marco Polo is looking for a perfect rig, they might as well not.

Marco Polo is either too new to the rig industry to know that those "cracks" are the norm or they're simply finding an easy way to wiggle out of the contract after the oil market crashed. 

SMM didn't deny the allegations on the "cracks" probably because those cracks really exist but they are also deemed to be reasonable. It's anyone's guess really.

What about SCI?

SCI owns about 60% of SMM. For the 9 months ending September 2015, profits from Utilities stands about $300m with Marine taking about $150m.

For the full year, I'm expecting profits from Utilities to be about $400m and Marine about $100m (worse case). This would result in about 26 EPS and with $3 share price, that'll be about P/E of 11.5

Forward P/E?

I don't have the crystal ball. But just to be on the conservative side, let's assume the following profit: 

Utilities: $450m 10% growth (India in GROWING).

Marine: $50m halved profits

This would roughly give a comparable profit year on year. I'm bull on utilities as Singapore contributions have levelled out and overseas contribution is expected to be the main uplift.

That'll mean full year EPS for next year might be 26cents as well.

If given a chance, would I still buy SCI?

Quick answer is no. No, because I don't like the fact that there's no clear positive catalyst insight for the Marine industry. But now that I'm already vested, would I realise my loss? No. My gut tells me that SMM will ride out this storm. It just needs a little more time.