Sembcorp Marine

Kim Eng on 22 Feb 2013

Results below expectations. SMM reported FY12 revenue of SGD4.4b (+12% YoY) and corresponding net profit of SGD538m (-28% YoY). Net profit came in 5% below our forecast of SGD567m. We warned that there could be downside risk to dividends, which came true with lower dividends of 13 cts/sh for the full year. We cut FY13-15F forecasts by 4-6% on lower margin assumptions. We reduced our TP to SGD5.40 but maintain our Buy call as we still see long term positives. However, SMM could succumb to near-term sell-down from weak margins and there will be opportunity to accumulate at lower levels.

Margins disappointed. Margins moved against our expectations for a recovery in 4Q12. Operating margins for 4Q12 came in at 10.8% bringing FY12 operating margins down to 12.5%. Management emphasised that this was due to more conservative approach taken in accounting for the drillship and rigs in initial stages of recognition. Contingencies taken could be released at later stages when cost estimation becomes clearer. We infer that this could mean that margins may improve at later stages.

Margin recovery still promising but expectations lowered. SMM was evasive in giving clear margin guidance stating that it depends on product mix, business mix and stages of recognition. We believe that a recovery in margin is still promising, given the build-up in orderbook and from more favorable product mix. However, we are lowering our expectations, cutting our operating margin assumptions to 12.9%/13.3% (from 13.7%/13.5%) for FY13F/14F.

Brazil capex to be reviewed. SMM also mentioned that budgeted capex for Brazil yard is being reviewed due to reconfiguration for better efficiency. We figured that capex may go up, but SMM indicated that they will give clearer guidance when it is finalized.

Order win outlook remains good. Net orderbook currently stands at SGD13.6b with SGD900m in new contracts secured YTD. Order win outlook is still good, coming from replacement rig demand and higher spec rigs. We expect new contract wins of SGD5.2b per year for FY13F and FY14F. We remain positive on long-term prospects. Maintain Buy.