By Low Pei Han
Tue, 23 Feb 2010, 09:10:19 SGT

Sembcorp Marine (SMM) reported a 13% rise in FY09 revenue to S$5.72b and a 63% increase in net profit to S$700m. Net profit beat both ours (S$526m) and market expectations (S$520m) because of significantly higher margins from rig building projects. Margins were higher due to a combination of operational efficiency, execution of projects ahead of schedule and resumption of margin recognition of some projects. We understand that operating margin in the first three quarters actually averaged 15% as SMM was conservative in its recognition policies. Demand for jack-ups is also improving with higher rig utilization (82% global utilization rate), whereas semi-subs and drillships (especially high spec units) are still seeing high day rates. The impact of higher foreign workers’ levy (Budget 2010) should not be substantial with phased increases over three years. SMM also sees this as a catalyst for higher productivity gains. We raise our fair value estimate to S$4.58 (based on 15x FY10F earnings) with higher earnings estimates to account for higher margins. Maintain BUY.

Results beat expectations. Sembcorp Marine (SMM) reported a 13% rise in FY09 revenue to S$5.72b and a 63% increase in net profit to S$700m. Net profit beat both ours (S$526m) and market expectations (S$520m) because of significantly higher margins from rig building projects. Rig building revenue rose 28% to S$3.6b with the revenue recognition of two jack-up rigs and a semi-sub rig (reached initial 20% threshold in 4Q09). The ship repair sector registered a decline of 11% in revenue due to a slow-down in seaborne trade last year, but was supported by regular customers with a steady base-load of work.

Higher-than-expected margins. Gross profit margin in 4Q09 was 33%, significantly higher than 16% in 4Q08 and 14% in 3Q09. Margins from rig building projects were higher due to a combination of operational efficiency, execution of projects ahead of schedule and resumption of margin recognition of some projects. Recall that customer Petromena filed for Chapter 11 bankruptcy protection and SMM suspended revenue recognition and was less aggressive in margin recognition in 9M09. With recognition of newer projects, margins were also lifted due to relatively better prices that were locked in the contracts. We understand that operating margin in 9M09 actually averaged 15% as SMM was conservative in its recognition policies.

Better market outlook. SMM’s current net order book (excluding ship repairs) stands at S$5.5b with deliveries and completion till early 2012, including the S$1.25b new orders secured in FY09. We are estimating S$3.5b worth of new orders this year, though Petrobras is a wild card. Demand for jack-ups is improving with higher rig utilization (82% global utilization rate), whereas semi-subs and drillships (especially high spec units) are still seeing high day rates. The group also has an optimistic long-term outlook on ship repair though short-term challenges remain with slower sea-borne trade. SMM said that demand for bigger docks remain strong, as well as niche market segments such as LNG carriers and passenger carriers.

Maintain BUY. Though foreign labour constitutes a sizeable portion of SMM’s workforce (estimated around 45%), the impact of higher foreign workers’ levy (Budget 2010) should not be substantial with phased increases over three years. SMM also sees this as a catalyst for higher productivity gains rather than an added cost. We raise our fair value estimate to S$4.58 (based on 15x FY10F earnings) with higher earnings estimates to account for higher margins. Maintain BUY.