Sembcorp Marine

Kim Eng on 3 May 2012

Expect margins to normalise. Sembcorp Marine (SMM) is due to announce its 1Q12 results next Wednesday. We expect flat YoY growth in quarterly core net profit to SGD155m. Lower margins should not be a cause for concern as they merely reflect a normalisation in terms of the orderbook being depleted of high-margin contracts secured prior to the global financial crisis. While we forecast EPS to slide by 7.7% YoY in FY12F, strong order wins should lift earnings in the subsequent years. We also fine-tune our forecasts and valuation model but maintain BUY and target price of SGD6.20.

Drillship orders soon to follow. After Sete Brasil signed an LOI with Keppel Corp last month for five semisubmersible orders, we believe that SMM would be next in line to be awarded its share of Petrobrasrelated contract of five drillships, estimated at USD4b in value. SMM had already won one drillship contract worth USD792.5m in February. We are now more confident that the contracts would be awarded to SMM and have incorporated this into our forecasts.

A record year of contract wins. SMM’s outstanding orderbook stood at SGD5.1b as at end-FY11. To-date, it has secured SGD2.7b in new contracts. We forecast SGD11.5b in contract wins, including the Petrobras-related orders. If this eventuates, 2012 would mark a record year of contract wins for SMM.

Capacity increase to come at the right time. Phase 1 of SMM’s Integrated New Yard facility is expected to be operational by end-2013 with an additional 73.3ha in land area. However, two of the four dry docks would be completed by 4Q12. This increase in capacity would come at a time when the sector is in its upturn and might give SMM an edge in terms of yard capacity availability.

Maintain BUY, TP SGD6.20. We have fine-tuned our valuation model and now use a DCF methodology to value SMM’s core business, as opposed to PER-based valuation previously. Implied FY12F and FY13F PERs for its core business are 17.5x and 16.0x respectively. Our SOTP-based target price is unchanged at SGD6.20. Maintain BUY.