Sembcorp Marine

OCBC on 3 Aug 2012

Sembcorp Marine (SMM) reported a 46.4% YoY rise in revenue but saw a 4.6% fall in net profit to S$142.8m in 2Q12, such that 1H12 net profit accounted for about 40% of both ours and the street’s full year estimates. However we had noted in our earlier report “More going for SMM in 2H12” (27 Jun 2012) that we expect SMM’s earnings to pick up in 2H12 as higher margin contracts contribute to the group’s results. Operating margin was 13.1% in 2Q12 but the group is still striving to achieve 14-15% for the year. Enquiries remain healthy and we expect them to consequently add to the group’s current order book of S$6.6b (vs S$5.1b as at end 2011). Meanwhile, construction at the Singapore and Brazil yards are progressing well. We tweak our estimates and update the market value of Cosco Corp in our SOTP valuation. As such, our fair value estimate slips slightly from S$5.71 to S$5.69. Maintain BUY.

Soft 2Q12 results but not a surprise
Sembcorp Marine (SMM) reported a 46.4% YoY rise in revenue but saw a 4.6% fall in net profit to S$142.8m in 2Q12, such that 1H12 net profit accounted for about 40% of both ours and the street’s full year estimates. Operating margin improved from 12.8% in 1Q12 to 13.1% in 2Q12 but was lower compared to 2Q11 which registered a high margin of 21.6%. We had noted in our earlier report “More going for SMM in 2H12” (27 Jun 2012) that we expect SMM’s earnings to pick up in 2H12 as higher margin contracts contribute to the group’s results.

Still sticking to earlier margin guidance
The group is still striving to achieve its earlier guidance of 14-15% operating margin for the full year (including work for Petrobras) and we think SMM is likely to see higher margins in the later quarters as more projects go beyond initial recognition phase and better margin contracts are recognized. Meanwhile, management also highlighted that excluding foreign exchange losses, operating margin would have been 13.9% in 2Q12 and 13.8% in 1H12.

Enquiries across the board
Enquiries for newbuilds remain healthy and the group is seeing interest for various products, such as semi-submersibles, jack-ups and FPSOs. There are “serious enquiries” from customers which are expected to add to the group’s current order book of S$6.6b (vs. S$5.1b as at end 2011) with deliveries extending till 2Q15.

Integrated new yard starts contributing in 2013
Management also reported that construction of its new integrated yard in Singapore is progressing well and operations at two of its docks may start as early as 2Q13 while docks 3 and 4 may commence in early 2H13. Meanwhile, we tweak our estimates and update the market value of Cosco Corp in our SOTP valuation. As such, our fair value estimate slips slightly from S$5.71 to S$5.69. Maintain BUY.