Sembcorp Marine

Kim Eng on 17 Oct 2012

Project recognition to play catch up. Sembcorp Marine (SMM) will release its 3Q12 results after trading hours on 5 Nov 2012. Following two lower-than-expected quarters, we expect SMM to report a stronger set of 3Q12 results on a QoQ basis. We attributed weak results for the preceding two quarters to timing of project recognition. We expect recognition to play catch up in 2H12, with a forecasted 3Q12 PATMI of SGD175m, a 23% increase QoQ. SMM is the preferred play among the shipyards under our coverage for its pure-play offshore and marine sector exposure.Maintain BUY and target price of SGD6.20.

Confident of margin improvement. As with Keppel’s Offshore & Marine segment, SMM reported weaker operating margins in the first two quarters (12.8%/13.1% for 1Q12/2Q12). While Keppel’s management were cautious and conservative in margin guidance (as they usually were), SMM was confident that margins would improve in 2H12 and maintained operating margin guidance of 14-15% for the full year. Our margin assumption of 14.3% for FY12F is within this guidance range.

More order wins coming. On 5 Oct 2012, SMM signed a LOI with repeat customer, Prosafe, for a semisub accommodation rig contract. This is of a similar design to Safe Boreas which was ordered by Prosafe previously and is currently being constructed by SMM. The latter also granted Prosafe options for two further new builds, bringing Prosafe’s options to three in total. The contract value has not been disclosed as a firm contract has not been signed, but we believe that it would be marginally higher than the USD291.6m price tag for Safe Boreas, as we expect rigbuilders to gain pricing power. SMM has secured YTD orders of about SGD9.2b, excluding the LOI mentioned here, against our expectation of SGD11b for FY12F.

Preferred offshore play, maintain BUY. Valuations wise, SMM is trading at FY13F PER of 13.2x. SMM is our preferred big-cap O&M play due to its pure-play nature, which tend to outperform during an O&M upcycle. Maintain BUY and SOTP-based target price of SGD6.20.