Semb Marine Research Report

by OCBC Investment Research (6 Aug)

SEMBCORP Marine (SMM) has reported an expectedly strong set of Q2 2008 results with the top line growing 32 per cent y-o-y to $1.386 billion, while the bottom line rose 51 per cent to $128.2 million. Rig building was its star performer, with sales rising 54 per cent y-o-y to $861 million. Should contracts with favourable clauses continue to be awarded, we are optimistic that SMM will be able to register a year of contract wins similar to FY2007.

Margins continue to surprise on the upside. SMM's margins have registered an improvement again and we think that it is due to a confluence of factors:

More projects coming into the work in progress phase and incurring initial 20 per cent recognition;

Repeated orders for the same rig design resulting in improved efficiencies; and

Effective steel price hedging with its suppliers.

However, relative to the current rig orders that are secured, we currently forecast that 2009 may be SMM's peak earnings year. Notwithstanding a collapse of oil price or extraordinary price hikes in raw material/equipment, SMM must continue to win orders from oil majors and national oil companies to provide firmer growth visibility past 2010.

A change in product mix from drilling equipment to non-drilling/production equipment and a ramp-up in ship repair will also support SMM's earnings.

On yard space, we believe that the main constraint is not full utilisation of its yard space, but the possible delays in equipment like drilling packages and onboard motors that have been in tight supply.

The bumper crop in rig orders in 2007 and 2008 will translate to a strong showing in the bottom line. If SMM continues its historical 70 per cent payout ratio, we anticipate a two-fold jump in dividends in FY2008.

For H1 2008, SMM declared dividends of $0.05 per share. SMM is a pure-play O&G manufacturer and its premium sum-of-the-parts valuation is geared to capture its earnings potential backed by on-time and on-budget deliveries, unlike new entrants into this field. Our FY2010 estimates will change with stronger order book visibility.

-Research Report by OCBC Investment Research (6 Aug)