Sembcorp Marine

OCBC on 10 May 2012

Sembcorp Marine (SMM) reported a 13.7% YoY rise in revenue to S$942.6m and a 24.9% fall in net profit to S$113.1m in 1Q12, such that net profit accounted for 15.6% and 16.5% of ours and the street’s full year estimates, respectively. Margins were lower in 1Q12 due to the initial lower margin from new design rigs; more higher margin projects should be recognised in the upcoming quarters. Meanwhile, enquiries for deepwater rigs remain strong. We tweak our margin assumptions and update the market value of SMM’s stake in COSCO Corp. As such, our fair value estimate falls from S$5.70 to S$5.12. Maintain HOLD.

Soft 1Q12 results
Sembcorp Marine (SMM) reported a 13.7% YoY rise in revenue to S$942.6m and a 24.9% fall in net profit to S$113.1m in 1Q12, such that net profit accounted for 15.6% and 16.5% of ours and the street’s full year estimates, respectively. The increase in revenue was due to the initial revenue recognition for several rigbuilding as well as ship conversion and offshore projects, compared to the same period last year. However, gross profit margin was lower due to the initial lower margin from new design rigs.

Margins dip
The group saw a dip in gross margin to 16.7% in 1Q12 vs 21.8% in 4Q11 and 23.5% in 1Q11. Operating margin was also correspondingly lower at 12.8% in 1Q12. Management previously guided operating margins of 15% or lower for FY12, and is still comfortable with this level as more higher margin projects should be recognised in the upcoming quarters.

Enquiries for deepwater rigs remain strong
SMM has a net order book of S$7.4b with deliveries stretching till 2Q15, and this includes S$3b of orders secured YTD (excluding ship repair). According to management, enquiries for deepwater rigs remain strong and the earliest delivery slots for jack-ups and semis are 2014 and 2015, respectively. However, there is still the possibility of a 2013 jack-up delivery should the price be right.

Maintain HOLD
We lower our operating margin assumptions from 15.5% to 15.0% for FY12 given the soft 1Q12 results, while noting that subsequent quarters should see an increase in margins, starting in 2Q12 when the US$218.5m rig for Gulf Drilling starts initial revenue recognition. We also update the market value of SMM’s stake in COSCO Corp. As such, our fair value estimate falls from S$5.70 to S$5.12. The stock price has dropped by 8.6% since we downgraded it in late Feb vs the STI’s 2.3% slide, but given limited upside potential we maintain our HOLD rating for now.