Sembcorp Marine

DMG & Partners, May 21

SEMBCORP Marine announced that it has secured a contract to build a Friede & Goldman JU 2000E jack-up rig for Hercules North Sea Ltd, which is scheduled for delivery in Q2 2016 and will be chartered out to Maersk Oil and Gas for deployment in the UK sector of the North Sea upon delivery. The new rig is designed to operate in waters of 400 ft and drill as deep as 30,000 ft. It is equipped with a 2m-lb drilling capacity, a mud capacity of 6,000 barrels and will be able to accommodate 150 workers.

With the latest contract win, Sembcorp Marine's YTD orders have increased to S$1.93 billion, meeting 39 per cent of our S$5 billion order win assumption for the year. Its net order book, which runs until FY19, stands at S$13.2 billion.

We reiterate the fact that the company's operating margins for Q1 2014 were stable at 11.1 per cent, while overall revenue fell 21 per cent q-o-q - indicating a core margin recovery. Operating leverage should accommodate a margin boost, as more revenue is expected to be recognised over the coming quarters.

We continue to prefer Sembcorp Marine, whose margins are likely to improve, over Keppel, which is likely to face continuous headwinds from its non-rig building businesses. Sembcorp Marine's earnings growth profile is also significantly stronger, and is now trading at 14.5x/11.8x FY14F/15 forecast earnings. This leads us to believe that it may outperform Keppel in the near term. Maintain "buy" with a S$5.00 TP, based on a SOP (sum of the parts0 approach.

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