Sembcorp Marine

Kim Eng on 10 May 2012

Lower due to timing issues. Sembcorp Marine’s (SMM) 1Q12 net profit dipped by 26% YoY and 37% QoQ to SGD113.1m, coming in lower than our expectations. However, the variance was mainly due to timing of revenue recognition and lower initial margins from new design jack-up rigs, which does not represent underperformance. We are keeping our full-year forecasts largely intact and expect stronger quarters ahead. Maintain BUY and target price of SGD6.20.

Normalising margins. Operating margins fell by 3.2ppts YoY to 12.8% this quarter. Other than the normalisation of margins as high-value contracts are depleted, the other factor was the initial lower margins for new design rigs. As the year progresses, Management expects margins to improve with revenue recognition from more rig units. SMM believes that overall operating margins should come in at about 15% for the year, which is consistent with our forecast.

Strong orderbook. Net orderbook stood at SGD7.4b with deliveries stretching up till 2Q15. SMM has secured about SGD3.0b of new contacts YTD and we are forecasting a total of SGD11.5b in new contract wins for FY12. SMM is still in negotiations with regard to the terms of Petrobras-related contracts which we estimate to be worth SGD5.0b. Nevertheless, we believe it is a matter of time before SMM secures the contracts.

Optimistic outlook ahead. We sense strong optimism in SMM’s outlook and order guidance. Sturdy market fundamentals in the offshore sector have kept enquiry pipelines at a healthy level and potential orders are expected to come from across all sectors. This has reinforced our confidence in our order win assumptions. There also appears to be no problems with banks extending financing to SMM’s customers.
Remain positive, order wins to drive share price. We remain positive on SMM and expect order win momentum to be the key catalyst to drive share price higher. Our target price is maintained at SGD6.20 based on our SOTP-based valuation. Maintain BUY.