Event
Steady as she goes. Sembcorp Marine (SMM) posted 2Q11 net profit of $149.7m, down 15% versus a bumper 2Q10, but broadly in line with expectations. Revenue declined by 24% to $831.3m but the variation is, once again, typical of revenue recognition differences. More importantly, SMM is on target to meet or exceed our full-year forecasts. Maintain BUY and target price of $6.66.
Our View
There was less revenue recognition in 2Q11 because the jackup orders secured recently are still in the planning stages. Gross margins, however, have further improved both on a YoY basis and sequentially, and currently stands at 23.7%. We expect this level of profitability to be sustained for the full year, although there could be some fluctuations on a quarterly basis. In fact, 3Q will also see higher-than-usual revenue, as SMM recognises revenue from the previously stalled Songa semi-submersible.
SMM has secured US$2.2b worth of contracts year-to-date with most being jackup orders. There are also eight options outstanding, collectively worth about a further US$2b. Net orderbook stands at around US$4.6b, with deliveries up to 2014.
We are likely to see a pickup in orders for the deepwater market. Management has indicated that enquiry levels are accelerating further, with buyers now more certain of new regulation implications following the Gulf of Mexico spill.
SMM maintained its usual 5-cent interim dividend. However, it may be willing to pay out higher annual dividends henceforth, depending on capex and capital requirements. Our analysis indicates that the group can comfortably pay out a total dividend of 21 cents per share per annum for an attractive yield of 3.9%.
Action & Recommendation
A strong catalyst to SMM’s share price would be if we see a firm order on the deepwater side; we believe this to be imminent. Our forecasts are unchanged and we maintain our BUY recommendation and SOTP-based target price of $6.66.
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