Sembcorp Marine

OCBC on 22 Aug 2012

Sembcorp Marine (SMM) has been one of the top performers in the O&M space so far this year due to several reasons: 1) demand for the group’s products remain high, supported by oil prices and buoyant activities in the industry, 2) its good track record and efforts to stay ahead of the curve have positioned it well to secure new orders, 3) its strong orderbook provides defensiveness when uncertainty in the global economy has resulted in a general lack of clarity in corporate earnings outlook, and 4) contracts have been forthcoming so far this year. Looking ahead, the above-mentioned factors are likely to remain for the medium term, and we still see upside potential for the stock based on forward valuations. We are also increasing our new order win estimate to S$9.5b (from S$8.7b) as we expect more contract wins. As such, our fair value estimate increases from S$5.69 to S$6.09. Maintain BUY.

Stock has performed well for good reason
Sembcorp Marine (SMM) has been one of the top performers in the O&M space so far this year, appreciating by about 36% (excl dividends) compared to the FTSE Oil & Gas Index’s 28% gain. In our view, there are several reasons for this good showing: 1) demand for the group’s products remain high, supported by oil prices and buoyant activities in the industry, 2) its good track record and efforts to stay ahead of the curve have positioned it well to secure new orders, 3) its strong orderbook provides defensiveness when uncertainty in the global economy has resulted in a general lack of clarity in corporate earnings outlook, and 4) contracts have been forthcoming so far this year.

Should still remain in favour among investors
Looking ahead, the above-mentioned factors are likely to remain for the medium term, and we still see upside potential for the stock based on forward valuations. 2H12 earnings are expected to pick up as higher margin contracts are recognized, and order flows should continue due to strong industry fundamentals. In particular, the demand for high spec rigs has been increasing given high oil prices and a relatively scarce supply of quality units, resulting in a corresponding increase in dayrates and utilisation levels. Operations at two dry docks in SMM’s new Singapore yard should also begin as early as 2Q13 while docks 3 and 4 may commence in early 2H13.

Increasing new order estimates
SMM has secured new orders worth about S$8.3b YTD, accounting for 95% of our original full year estimate. With more than four months to go till the end of the year, we are increasing our new order win estimate to S$9.5b as we expect more contract wins (including FPSO work from Petrobras worth US$700-$1b) for SMM. As such, our fair value estimate increases from S$5.69 to S$6.09. Maintain BUY.