Sembcorp Marine

Kim Eng on 5 May 2014

• Another disappointing quarter; without a ramp-up in ship repair volume, operating margin stayed flat QoQ at 11.1%.
• Benefits of the new Tuas yard may take longer than expected to materialise; we see risk for order wins to taper off in 2H14 as deepwater day rates have softened.
• Downgrade to HOLD, SOTP-based TP cut to SGD4.36.

What’s New
Sembcorp Marine’s (SMM) 1Q14 PATMI of SGD122.5m (+3.1% YoY, -32.9% QoQ) fell short of expectations, making up just 18% and 20% of our and consensus full-year forecasts. While shipyard profits tend to be lumpy, our greatest concern is the ship repair revenue, which stagnated at SGD158m in 1Q14. Obviously, the benefits of the new integrated Tuas yard have failed to come through. As a result, operating margin stayed flat QoQ at 11.1% (1Q13: 13.7%, 4Q13: 11.1%).

What’s Our View
An improvement in operating margin hinges on ship repair volume which commands higher margin. With ship repair volume failing to take off, we lower our annual ship repair revenue assumptions by 21-23% to SGD745-936m for FY14E-16E.
With a large number of new rigs expected to flood the market this year and next, deepwater floater charter rates have softened, suggesting risk for less new deepwater rig orders in the short-term. We thus lower our FY14E-16E order win assumptions to SGD4.4b from SGD5.1b. SMM has secured SGD1.63b in new contracts YTD, representing 37% of our revised order win assumption.
Our FY14E/15E/16E EPS is slashed by 17%/16%/22% and our SOTP-based TP thus falls to SGD4.36 (from SGD5.04). At our TP, SMM is priced at 15.8x FY14E P/E, close to its historical mean since 2005. In view of its weaker earnings growth profile and short-term challenges, we downgrade the stock to HOLD (from BUY).