Brokers' Call: Sembcorp Marine

Sembcorp Marine (SMM) | Add

Oct 18 close: $1.85

Target price: $2.52

Broker: CGS-CIMB, Oct 18

We concur with the management that the offshore newbuild sector has started to recover, but it is in the initial stages.

We think this is similar to the early cycle seen in 2003-2004, when the utilisation of rigs in demand was about 70 per cent. Discussion on the Gravifloat project continues, but there is no clarity on the timeline. Therefore, we think SMM may not meet our $2 billion and the market's $2 billion to $3 billion order target for this year. Instead, we think $1 billion to $1.5 billion would be more realistic.

Assuming a $1 billion order this year, earnings for FY19F-20F could be cut by 6 per cent a year. We are leaving our numbers unchanged.

In the year to date, SMM has clinched only $730 million of orders. Management expects a better FY19 for orders, balance sheet and margin. SMM has delivered eight out of nine Borr Drilling rigs, with final payment pending successful charter of the rigs by next year.

With the deferred payment, interest income will rise in the second half of 2018. Interest income for the first half this year was $19 million (+85 per cent year on year).

The balance sheet is also set to improve by the fourth quarter, with a US$150 million (S$207 million) final payment for the West Rigel semi-sub.


Singapore Airlines (SIA) | Buy

Oct 17 close: $9.33

Fair value: $10.71

Broker: OCBC Investment Research, Oct 17

SIA's share price has dropped 23 per cent from its peak of $11.80 around the end of May, and is now trading at its 52-week low. Its Tuesday close of $9.15 is a shade off the 2008 crisis low of $9.05 and just 11 per cent higher than the 2002-2003 Sars crisis low of $8.25.

Though consensus is estimating a dividend yield of about 4.2 per cent, we note this is likely based on last year's dividend of 40 cents a share, which may or may not be sustained, given there is historically less consistency in the group's dividends, compared with other Singapore-listed blue chips.

We share the market's concerns about rising fuel prices but note that for FY19, about 45 per cent of SIA's fuel needs are hedged; and its current share price is now even lower than previous instances when Brent was trading at much higher levels.

In the upcoming second-quarter FY19 results, the group should recognise its share of losses from Virgin Australia, which saw one-off items such as impairments, and we tweak our fair value lower, from $11.01 to $10.71.

There is good upside should passenger and cargo yields turn out better than expected.


DBS Group Holdings | Buy

Oct 17 close: $24.49

Target price: $29.50

Broker: UOB Kay Hian, Oct 17

We expect loan growth of 1.2 per cent quarter on quarter and 8.8 per cent year on year in the third quarter, in line with the toned-down guidance of 6 per cent to 7 per cent for the full year.

The expansion of corporate loans and mortgages was offset by shrinkage in trade loans. In addition, we anticipate continued but gradual net interest margin (NIM) expansion of one basis point (bp) quarter on quarter to 1.86 per cent in the third quarter due to DBS' strong deposit franchise for the Sing dollar.

On a year-on-year basis, NIM expanded by 13 bp, which could generate strong growth in net interest income of 16 per cent year on year to $2.3 billion. We expect fees to have been marginally down by 1.8 per cent quarter on quarter, but up 1.2 per cent year on year at $693 million. High-net-worth clients turned more risk-averse, resulting in weakness in wealth management fees, offset by decent growth from credit cards.

We forecast net profit of about $1.4 billion, up 3.9 per cent quarter on quarter and up 72.8 per cent year on year. We also expect bouts of volatility in the run-up to the US midterm elections on Nov 6. Upgrade to "buy" with new target price at $29.50.

A version of this article appeared in the print edition of The Straits Times on October 22, 2018, with the headline 'Brokers' Call'. Print Edition | Subscribe