Tuesday, May 12, 2009

SembCorp Marine - Hold by OCBC (11 May 09)

Good results. Sembcorp Marine Ltd (SMM) reported its 1Q09 results with topline came in at S$1.36b (+49% YoY, -16% QoQ). PATMI registered S$120.2m (+32% YoY, +73% QoQ). SMM did well when compared to a weak 1Q08 which had project revenue recognition timing issues. The group also experienced a better gross margin this quarter as it started reaping from the better priced contracts signed during the peak 2007- 2008 phase. The group's net cash position stood at S$1.89b while order book stood at S$8.4b.

Repair activities seem peak-ish. SMM's ship repair activities seem to have come to a plateau with a net change in ships repair growing in the high single digits this quarter. While SMM iterates that a base load (~80%) of its repairs consists of exclusive agreements with major shipping/ oil companies that are regulars at its docks, we are waiting to see if this should tail off as companies anchor vessels as demand for goods and raw materials slows down. A slew of LNG tankers coming on stream could affect SMM's repair of this vessel class as the recession takes
demand off fuel.

No clarity with Petrobras… yet. Management has indicated that discussions with Petrobras are ongoing and are confident of some positive newsflow in the future. With about half of the 28 drilling assets slated to be semi-subs, it translates to about US$7.7b worth of orders (14 x US$550m). However, there is no clarity on the quantum and timing of contracts being discussed. The bug-bear issue with Petrobras is its requirements for the use of "local content" to sustain employment in Brazil's yards. SMM's jointly operated MacLaren yard is its only presence in Brazil. MacLaren is currently building a new dock (ready 2H09) capable of drydocking the largest of semi-submersible rigs.

Pricing for hope. We have upped our estimates in view of a more aggressive recognition of higher valued projects from FY07/08. However, SMM still has another S$1b worth of wins to catch up with our forecasts for FY09. Oil prices have run up in tandem with equity markets and we bump up our valuation peg to 13x FY09F PER (prev. 11x). While our fair value is now raised in tandem to S$2.65 (prev. S$2.02), we find the hope of the sustained oil price rise of the recent magnitude to lack fundamentals. As such, we are maintaining our HOLD rating.

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