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Sembcorp Marine

May 6 close: S$4.25

DBS Vickers Research, May 6

SEMBCORP Marine's (SMM) net earnings grew by 5 per cent to S$118.7 million in Q1 2013, forming 19 per cent of our full-year forecasts. This was a tad disappointing, due to slower than expected revenue recognition from its order book, lower gross margins while associates' contributions were halved to only S$6.2 million arising from weak contributions from Cosco Corp. Order book stands at S$13.6 billion, with work stretching up to 2019 due to the Petrobras projects' (S$7.9 billion) long duration of eight years. Although book to bill ratio is high at 3.2 times, revenue visibility for 2014 will drop to 63 per cent backed by existing orders.

To date, the group has secured new projects worth S$1.7 billion, or 34 per cent of our new order win assumptions of S$5 billion, on track to meet our expectations. SMM will recognise revenue of about S$4 billion from the order book for FY2013, and expect to pick up initial recognition of the second drillship in Q4 2013. With the new mega yard at Tuas commercially ready in H2, shiprepair sales will be higher - we are projecting a 14 per cent y-o-y rise in shiprepair sales for FY2013.

Jack-up enquiries from the Gulf of Mexico remain buoyant, while we expect semi-submersible orders to lead new order cycle. However, intensified competition from Korean and Chinese peers could limit price increase of new contracts. While gross margins could be under pressure, efforts to cut operating expenses and GSA (general selling and administration expenses) will keep operating margins stable.

We cut FY2013/14 net earnings by 8 per cent/4 per cent, factoring in slower revenue recognition (-9.5 per cent/-2.5 per cent). Target price is cut to S$4.70 based on blended 2013/2014 earnings. The group expects to raise its capex for Brazil yard from the original estimate of US$550 million, which has yet to be finalised. Assuming it maintains dividend payout policy of 50 per cent, dividend yield is not attractive at 3.1 per cent. Maintain "hold".

We will turn buyers on: a) rapid ramp-up of new orders to boost 2014's visibility, b) strong pick-up in repair sales in H2 2013, c) continued improvement in margins, and d) higher dividend payout ratio.

HOLD

- By KENNETH LIM

Glossary:

EPS - earnings per share

Ebit - earnings before interest & tax

Ebitda - earnings before interest, tax, depreciation & amortisation

FY - fiscal/financial year

H1, H2 - first or second half

NAV - net asset value

9M - nine months

P/B - price/book value (ratio)

PE - price/earnings (ratio)

Q1, Q2, Q3 - first, second, or third quarter

q-o-q - quarter-on-quarter

ROE - return on equity

RNAV - revised net asset value

TP - target price

y-o-y - year-on-year

YTD - year to date

Disclaimer: All analyses, recommendations and other information herein are published for general information. Readers should not rely solely on the information published and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

Brokers who wish to send in their reports can email us at btnews@sph.com.sg