Sembcorp Marine

UOBKayhian on 13 Feb 2015

- 4Q14: The good, the bad and the ugly. (SMM SP/HOLD/S$2.99/Target: S$2.93)

FY15F PE (x): 11.3
 FY16F PE (x): 9.7

4Q14 was ahead of our expectation on sharly higher margins. Sembcorp Marine (SMM) reported a net profit of S$560m in 4Q14, which was ahead of our forecast of S$535m. Operating margin was sharply higher at 16.1% vs 10.0% in 3Q14 and 11.1% in 4Q13. Management attributed this to repeat orders and greater efficiencies. This was the first significant uplift in operating margin after eight quarters of weak margins. Associates contributed a loss of S$7.4m in 4Q14 (due to losses at COSCO Shipyard Group). This was offset by a tax write-back of S$10.9m in the quarter. Sete Brasil is behind payment since December. Up until Nov 14, Sete Brasil had made monthly payments for the four drillships that have commenced construction. As of Oct 14, the four drillships were 79%, 54%, 30% and 14% completed. At yesterday’s results briefing, management said collectively S$70m-80m are in arrears. SMM is in discussion with Sete Brasil for a way forward. Last month, newslines reported that Sete Brasil would be securing financing lines from Brazil's Brazilian Development Bank (BNDES) and Merchant Marine Fund (FMM) in three tranches. The first tranche of US$5.2b with BNDES would be used to finance 9 of 29 rigs for delivery in 2016-2016. This would include 3 drillships from SMM and 2 semis from Keppel. The second tranche of US$8.2b would be used to finance 12 rigs for delivery in 2017-18. The third tranche of US$5.5b would be used to finance the last 8 rigs for delivery in 2019-20. We tweak our target price marginally from S$3.00 to S$2.93, based on 9.5x 2016F PE. Based on Brent oil price of US$60-70/bbl, our adjusted regression analysis suggests SMM should be priced at a 1-year forward PE of 9.5x. Maintain HOLD. Entry price is S$2.50.