Sembcorp Marine

Kim Eng on 29 Mar 2012

A class act. Despite a relative lull in new orders, Sembcorp Marine (SMM) is still in a prime position to benefit from the rig-building cycle upturn. In fact, it could have its strongest year ever for order wins. Based on the strength of its growth outlook and outstanding orderbook execution, we maintain our Buy call and raise our target price to $6.21.

A record year in the making. Judging by the enquiry levels it received and progress on negotiations, we believe that SMM should be able to secure US$3.5-4b in new order wins, with US$1.4b already secured YTD. The previous record year was 2008 with US$4.5b of new orders.

Petrobras orders potentially worth over US$4b. Furthermore, we have not yet factored in orders from Petrobras. Newswires have reported that the remaining five units for the overall drillship package could be awarded to SMM soon, at an estimated value of US$4b. Aside from drillships, SMM is also exposed to opportunities from Petrobras via orders for FPSOs, production modules and other support vessels.

Underlying market still firm. Recent rig orders may not have come nearly as thick and fast as that seen in the last cycle peak in 2007-08, but SMM believes that the current cycle is more orderly with fewer speculative players entering the market. This is also a similar situation on the credit side, with the more established banks traditionally involved in rig financing still prepared to fund reputable rig operators. Overall, SMM is seeing strong enquiries across the board for jack-ups, semisubmersibles and production assets.

Raising target price. SMM’s order backlog currently stands at around US$5.4b. Though we are forecasting lower earnings in FY12 due to the slowdown in orders in FY09 during the financial crisis and a lower margin assumption on more normalised pricing, our long-term outlook is still highly positive, as we see earnings strength resuming from FY13 onwards. Our SOTP-derived target price is raised to $6.21 from $5.58,
based on 17x FY13F PER. Maintain Buy.