Sembcorp Marine’s (SMM) share price has fallen by about 10% since early Sep, with about half of this drop in the last five trading days. We believe that this is partly due to weaker oil prices of late, as well as company-specific factors such as worries over execution risks for its new drillship. According to our checks, the first drillship has finally left for Brazil, and SMM has reiterated that the unit is still on track for Jun 2015 delivery. We had been forecasting operating margins of 11.7% for FY14 and 12.6% for FY15 (1H14: 11.3%). To be more conservative, we lower our FY15 margin assumption to 11.9%. With this, we see limited downside risks to margins. Though our fair value estimate is correspondingly lowered from S$4.36 to S$4.18, we see a 20.5% upside (this includes a ~4% dividend yield) on the stock, which is attractive. Upgrade to BUY on SMM, as the recent sell-down seems to be overdone.
Aggressive selling in recent days
Sembcorp Marine’s (SMM) share price has fallen by about 10% since early Sep, with about half of this drop in the last five trading days. This compares to the STI’s ~3% fall since early Sep. We believe that this is partly due to weaker oil prices of late, as well as company-specific factors such as worries over execution risks for its new drillship.
Drillship has left for Brazil; on track for Jun 2015 delivery
According to news reports online , the Dockwise heavy-lift vessel Black Marlin has been seen ballasting down last Friday to load SMM’s first drillship, the Arpoador. A call with SMM also confirmed that the unit has left Singapore for Brazil, and SMM reiterated that the unit is on track for delivery in June next year, despite its departure date from Singapore being delayed for more than six months from its original schedule.
Execution risk has been lowered with more construction done in SG
The market has been worried that SMM would fail to deliver its first drillship on time, especially with the yard in Brazil being new and inexperienced. While acknowledging these risks, we point out that execution risk of this unit may actually be lower now with a greater percentage of the construction work being done in Singapore instead of the new Brazil yard – at least 70% of the unit has been completed. We also would not be surprised if SMM has built in a buffer or a grace period, since this is a new product for the group.
Significant upside despite lowering margins
We had been forecasting operating margins of 11.7% for FY14 and 12.6% for FY15 (1H14: 11.3%). To be more conservative, we lower our FY15 margin assumption to 11.9%. With this, we see limited downside risks to margins. Though our fair value estimate is correspondingly lowered from S$4.36 to S$4.18, we see a 20.5% upside (this includes a ~4% dividend yield) on the stock, which is attractive. Upgrade to BUY on SMM, as the recent sell-down seems to be overdone.
Sembcorp Marine’s (SMM) share price has fallen by about 10% since early Sep, with about half of this drop in the last five trading days. This compares to the STI’s ~3% fall since early Sep. We believe that this is partly due to weaker oil prices of late, as well as company-specific factors such as worries over execution risks for its new drillship.
Drillship has left for Brazil; on track for Jun 2015 delivery
According to news reports online , the Dockwise heavy-lift vessel Black Marlin has been seen ballasting down last Friday to load SMM’s first drillship, the Arpoador. A call with SMM also confirmed that the unit has left Singapore for Brazil, and SMM reiterated that the unit is on track for delivery in June next year, despite its departure date from Singapore being delayed for more than six months from its original schedule.
Execution risk has been lowered with more construction done in SG
The market has been worried that SMM would fail to deliver its first drillship on time, especially with the yard in Brazil being new and inexperienced. While acknowledging these risks, we point out that execution risk of this unit may actually be lower now with a greater percentage of the construction work being done in Singapore instead of the new Brazil yard – at least 70% of the unit has been completed. We also would not be surprised if SMM has built in a buffer or a grace period, since this is a new product for the group.
Significant upside despite lowering margins
We had been forecasting operating margins of 11.7% for FY14 and 12.6% for FY15 (1H14: 11.3%). To be more conservative, we lower our FY15 margin assumption to 11.9%. With this, we see limited downside risks to margins. Though our fair value estimate is correspondingly lowered from S$4.36 to S$4.18, we see a 20.5% upside (this includes a ~4% dividend yield) on the stock, which is attractive. Upgrade to BUY on SMM, as the recent sell-down seems to be overdone.
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