Sembcorp Marine

Kim Eng on 20 Feb 2013

Expecting a stronger fourth quarter. Sembcorp Marine (SMM) will release FY12 results after trading hours on 21 Feb 2013. Quarterly figures should turn out stronger QoQ after 3 preceding slow quarters due to timing issues. We forecast FY12F revenue of SGD4.5b (+13% YoY) and net profit of SGD567m (-25% YoY), which are higher than consensus. We expect final and special dividends of 15 cts/sh, bringing full-year dividends to 20 cts/sh. However, we think that there is risk on the downside for dividends given weaker earnings YoY. Maintain Buy with TP of SGD5.60.

Revenue recognition for first drillship. SMM is expected to achieve initial recognition for the first Sete Brasil drillship (at least SGD198m in revenue recognition) in 4Q12. This should contribute to our expectation of higher revenue for the quarter. We are unsure if SMM would disclose the specific margin for the drillship. Nevertheless, we believe that SMM would be conservative in assigning the associated cost at the initial stage. Initial margins could therefore be depressed and should not be misconstrued as eventual margins of the drillship projects.

Other rigs reaching initial recognition. We figure that up to 4 jackups and 2 semis are due to reach initial recognition stage within these 2 quarters. Some of the jackups would likely be recognised in 4Q12, providing further boost to the topline (but at more conservative margins). The semis would likely be recognised only in 1Q13.

Margin surprise from variation orders? We also expect some variation orders to be concluded at year-end and this could negate potentially lower margins or even result in positive margin surprise. We anticipate operating margins of about 15.3% in 4Q12, and overall FY12F operating margins would then be about 13.9%.

What to look out for? These include potential repercussion because of the tilted rig, order win expectations and forward margin guidance. SMM may be less willing to comment on the latter given previous ‘misunderstandings’ by the market. Risks from competition should once again be flagged. We maintain our positive view and reiterate Buy with SOTP-based TP of SGD5.60.