Sembcorp Marine FY11 dividend of 25 S cents

Fair Value S$5.70

FY11 net profit slightly above expectations
Sembcorp Marine (SMM) reported a 1.5% YoY rise in revenue to S$997.6m and a 4.3% fall in net profit to S$229m in 4Q11, bringing full year revenue and net profit to S$3.96b and S$751.9m, respectively. FY11 net profit was 8% higher than our expectations, and this was mainly due to foreign exchange gains of S$10.4m in 4Q11 and substantially lower general and administrative expenses (S$34.2m, 50.4% lower YoY) with lower bonus provisions compared to 4Q10.

Expecting lower margins going forward
Management has guided operating margins of 15% or lower for FY12, vs FY11’s 18.6% and FY10’s 20.7%. Margins may also be lower in FY13 when the new Brazilian yard comes into operation as there could be initial teething problems, and it also pays to be prudent to assume conservative margins for SMM’s first drillship in Brazil.

Hardly any major catalysts left after Petrobras
There has been ample coverage on Petrobras’ rig orders and it is quite likely that the market has priced in these expectations in SMM’s stock price by now. We have also highlighted the possibility of new semisubmersible rig orders in our earlier reports with the tightening of the deepwater market. However, these have been reflected in our new order wins estimate of S$8.7b. Hence though there could be a positive knee-jerk reaction in the stock price when the Petrobras orders are awarded, we do not see any other major re-rating catalysts in the near term.

Limited upside; downgrade to HOLD
We have tweaked our estimates to take into account our higher new order wins assumption and updated the market value of SMM’s stake in Cosco Corp. As such, our fair value estimate rises from S$5.63 to S$5.70. SMM’s stock price has rallied about 37% YTD vs the STI’s 12% rise and the FTSE Oil and Gas index’s 24% gain. As we now see limited upside potential in the stock price, we downgrade SMM to HOLD.

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Pricing in Petrobras’ orders
We have always believed that SMM would secure its fair share of orders from Petrobras but have refrained from incorporating any wins in our estimates due to persistent delays in the award. However, in Dec last year, SMM announced the groundbreaking ceremony of its new yard in Brazil and in Feb this year, it won a US$793m drillship order from Sete Brasil. Assuming SMM wins six drillship orders this year at US$785m each (excluding the one already secured, as the order stems from EAS’ inability to deliver on time on budget), this would add S$4.7b to its orderbook, though near term impact on earnings is limited. We price this expectation in and our FY12 new order estimate now more than doubles to S$8.7b. Meanwhile, SMM’s new yard in Brazil is expected to be ready in early 2013 and the first drillship should contribute to earnings in FY13-15.

FY11 dividend of 25 S cents vs FY10’s 36 S cents The group has recommended a special dividend of S$0.14/share on top of its final dividend of S$0.06. Together with the earlier S$0.05 interim dividend, this brings total FY11 dividend to S$0.25/share. This is lower than FY10’s total dividend of S$0.36/share (S$0.05 interim, S$0.06 final, S$0.25 special).


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