Oct 28, 2011

Sembcorp Marine: S$54m gain from tax refund

DMG - TP: S$5.46

The news: Sembcorp Marine

SMM to gain from IRAS refund. SMM will recognise a gain of S$54.4m in 2011 as Jurong Shipyard, a wholly owned subsidiary, has been allowed deduction of its losses from forex transactions for tax purposes for the Years of Assessment 2008 and 2009. The tax had been provisionally paid and a refund will be received from IRAS. We estimate the refund to boost our FY11F EPS by around 8%. SMM will release its 3Q11 results on Thursday, 3 Nov 2011, and we estimate net profit of S$230m, up 54% QoQ but down 24% YoY as 3Q10 was boosted by a one-off gain of S$53m from forex settlement with SocGen and resumption of recognition for a CJ70 rig.

Our thoughts: Maintain BUY on SMM with a TP of S$5.46. We prefer SMM over Keppel as we expect stronger newsflow for SMM given more capacity to bid for jobs and higher impact from potential Petrobras win.

Re-iterate positive view on the sector.
Several newbuild semisub rigs have signed long term drilling commitments in the past month with day rates of around US$475-500k per day, and we believe this could lead to renewed interest for semisub newbuilds. Oil prices continue to stay at a healthy level that encourages drilling and reinvestment. We maintain our Overweight rating on the Singapore offshore & marine sector. Stocks in the sector has risen 23-29% from its three-month low and we believe positive newsflow will continue to re-rate the sector.

We prefer Sembcorp Marine (SMM) (BUY; TP:S$5.46) over Keppel Corp (BUY; TP:S$11.40):
(1) Petrobras could award the contracts for 21 deepwater rigs in the next couple of months and the award will have bigger impact on SMM’s order book and FY13F EPS;
(2) SMM has more capacity to bid for near term jobs due to lower order win in the past 12 months vs. Keppel.

Day rates continue to rise on strong demand for new units.
We note that semisub day rates have risen by 15-20% from US$420-430k/day in 2010. Major contracts signed in the past month for semisubs are: (1) Maersk’s US$780m four plus one year contract with BP for Maersk Discoverer with day rate of ~US$500k/day; (2) Seadrill’s US$204m contract with Tullow to operate West Leo in Ghana with day rates exceeding US$500k/day; (3) Seadrill’s US$909m five-year contract with an unnamed oil major in North America for West Capricorn. Implied day rate of US$487k/day. (4) Ensco has signed a 21-month commitment with Anadarko, Apache and Noble Energy for ENSCO 8505 semisub with a day rate of US$475k/day.

Market commentary points towards tightening rig supply demand.
This is in contrast to the growing concerns over economic slowdown due to the Eurozone crisis. Recent increase in deepwater drilling permits in the Gulf of Mexico could help to absorb some of the newbuilds.

Big names sourcing for newbuild semisubs.
We understand Statoil is looking at three more newbuild semis while BP and Vietsopetro is also looking at one unit each. Statoil’s interest in new semisubs are driven by its recent giant North Sea discovery in the Aldous Major South field which has an estimated 900m to 1.5b barrels of oil. More semisub orders could be placed in the next six months.


KIM ENG - target price of $4.95

Sembcorp Marine (SMM) will record a $54.4m refund of tax in its income statement due to the favourable tax assessment following the amicable settlement of the disputed foreign exchange transactions. It has been allowed a deduction from its losses from this recorded in FY08 and FY09. As tax had provisionally been paid pending the decision, a refund will be received from the Inland Revenue Authority of Singapore in due course.

If refunded by this financial year, the reversal will provide a 7% boost to our forecast for FY11 to $808m. We stress that this is a one-time adjustment, but we believe that it may be applied, if SMM so chooses, towards paying out its dividends. The $54.4m represents approximately 2.6 cents a share.

Fundamentally, we remain sanguine on SMM’s prospects and the potential for its share price recovery. Maintain BUY and target price of $4.95.

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