Sembcorp Marine - Driven by Songa Eclipse (DBSV)

BUY S$4.10 STI : 2,810.04

Price Target : 12-month S$ 4.60 (Prev S$ 4.80)

Reason for Report : Revision in earnings forecasts, TP; new FY13F

Potential Catalyst: New orders, uptrend in margins

DBSV vs Consensus: FY11 above consensus by 2.6% on higher margins

• 3Q11 core PATMI down 9% y-o-y; 9M11 forms 71% of our FY11F

• Slow order wins in 3Q led to reduced orderbook of S$5.2bn, book-to-bill of 1.3x

• Demand for offshore projects remains strong; Petrobras’ rig tender (worth up to US$4.2bn) remains the wild card

• FY11F/12F revised -2%/-5%; maintain BUY, TP S$4.60

Lumpy earnings buoy 3Q11. 3Q11 core PATMI fell 9% y-o-y to S$222.5m, but was up 49% q-o-q, boosted by profits from the completion and delivery of Songa Eclipse semi-submersible, which formed around half of 3Q11 earnings. Excluding this, 3Q was below expectations, due to 1) slower drawdown of its order book and 2) lower EBIT margins.

Robust deepwater prospects – 8 jack up options outstanding. Despite the ongoing macro uncertainty, industry fundamentals continue to firm up, with activity levels picking up across the offshore value chain. Enquiry levels remain strong for a variety of rigs and platforms. Outstanding options for 8 jack ups worth US$1.6b, with 2 expiring in Dec, could materialize into contract wins in the near term. However, the tighter credit environment could moderate the pace of contract awards, leading to a reduction in our FY11 order wins assumption to S$4.5bn from S$5.0bn previously. Management is guiding for S$4b to S$5b worth of new order wins in 2011. Petrobras remains the wild card not factored in our numbers, which could add US$3.6-4.2bn if SMM is awarded the entire contract for the 6 drill-ships. Current order book of S$5.2b translates into book to bill of1.3x.

FY11/12F reduced 2-5%; maintain BUY with TP S$4.60. We trim our FY11/12F earnings by 2%/5% to account for the weak 3Q11, reduced FY11/12 EBIT margins, and a reduction in our FY11 order wins assumption to S$4.5bn. Our sum-of-parts based TP for SMM is accordingly adjusted to S$4.60 (prev S$4.80) as we roll forward our valuation to a reduced FY12F and adjusting for our recently reduced TP for Cosco Corp to S$0.88. Its strong balance sheet with net cash of S$1.9b should underpin a high dividend payout, translating into dividend yield of 6%. Maintain BUY on SMM.