Sembcorp Marine (KE)

Event

Sembcorp Marine (SMM) posted 3Q11 net profit $222.5m, down 25% versus a bumper 3Q10. This is in line with expectations. While 3Q11 revenue grew by 16.8% YoY to $1,302.3m, the divergence was due to the difference in revenue recognition on a specific project. There were no major surprises with the group delivering exactly as expected. It is on target to meet our FY11 forecasts. Maintain BUY and target price of $4.95.

Our View

Sales in 3Q11 were boosted by the revenue recognition of the semisubmersible Songa Eclipse, which was previously stalled pending its sale to a new owner. As a result, gross margins were also sequentially lower from 23.6% to 19.7%, but YTD gross margins at 21.9% are still reflective of our full-year projection.

SMM is predominantly still executing on its high-value orderbook secured prior to the 2008 downturn. This explains why its margins have held up. Going forward, we expect SMM to progressively switch to jobs that were secured over the past 18 months at a relatively lower

margin. We thus expect margins to broadly decline from 2Q12 onwards. The erosion is in the region of 3-4%, but this will be mitigated by a pickup in revenue generated from its more recent order wins.

SMM has secured US$2.6b worth of contracts YTD with most being jackup orders. There are also eight options outstanding, collectively worth about another US$2b. Net orderbook stands at around US$4.2b, with deliveries up to 2014.

Management has indicated that enquiry levels for the deepwater segment have increased, with buyers now having more certainty of new regulations in the wake of the Gulf of Mexico spill. We expect to see orders for semisubmersibles within the coming months.

Action & Recommendation

Our forecasts are only being adjusted for the $54.4m tax refund due to the favourable tax assessment from the disputed foreign exchange transactions losses in FY09 and FY10. Core earnings are unchanged. We maintain BUY with an SOTP-based target price of $4.95, with the core shipyard operations valued at just 13x FY12F earnings.