Sembcorp Marine

Kim Eng on 7 Feb 2012


Confirms first drillship order of US$793m. Sembcorp Marine (SMM) has announced that its Brazilian shipyard has secured a contract worth approximately US$792.5m from Séte Brasil for the design and construction of a drillship. The announcement confirms what industry newspapers have been reporting in the past two weeks. SMM’s share price has rallied in anticipation of the confirmation and with more positive news likely to come, we raise our target price to $5.58/share. Maintain Buy.

Made in Brazil. The drillship is scheduled for delivery by 2Q15, and will be built in tandem with the development of SMM’s US$550m Estaleiro Jurong Aracruz. The relatively high pricing compared with previous international drillship orders at around US$600m reflects both the higher specifications of this unit, as well as the buffer it will offer against higher construction costs in Brazil to satisfy local content requirements.

FY11 results due on 23 February. SMM will announce its FY11 earnings on 23 February 2012. We expect the group to cap off the year with another solid quarter on execution of its ongoing orderbook, and EBIT margins to be maintained at a healthy 17-18%. Our FY11 net profit forecast stands at $733.7m, which is ahead of consensus estimate of $711m. For FY12, we expect to see sustained contributions from orders secured in FY10 and FY11. However, margins may see a decline due to the transition to lower-priced contracts.

Outlook improved. Given that the bulk of the earnings from the drillship contract will materialise only in FY14 and FY15, there is little change to our near-term forecasts. SMM’s order backlog currently stands at around US$5.1b and we estimate another US$4b worth of new orders to be secured for FY12 (excluding Petrobras). As we are still confident that Singapore’s rig builders will be beneficiaries of Petrobras’s capex, we ascribe a higher 15x multiple to SMM’s FY12 earnings to factor in its improved prospects. Our new SOTP-derived target price is $5.58 ($4.95 previously). Maintain Buy.