Sembcorp Marine's new Tuas yard predicted to double repair capacity

The new  yard will nearly double SMM?s  current repair, conversion and  offshore capacity of 1.9m DWT. The  estimated current utilisation rate of  the yard is about 70%, with all four  dry docks occupied with repair jobs.

More ships are expected to be  progressively rerouted to the yard  from Pulau Samulun (Jurong  Shipyard?s main repair facility).

Phase  2 of SMM?s integrated yard (34.5ha)  will take another four to five years to  develop. Total capex for phase 1 was  about S$900m, which is higher than  the original target of S$750m as  certain building works (such as the  dormitory) were brought forward.

Here's how Sembcorp Marine plans to beat Korean, Chinese rivals

The new yard?s deeper quay (15m) (vs. the old Jurong yard?s 9m) allows SMM to take on semi-sub repair and work that requires thruster installation.

SMM also expects to lower its logistics cost  as repair work will be consolidated at one yard, ensuring faster turnaround. One of the dry docks is also able to house large 18,000TEU containerships.

During the shipyard tour for analysts  today, we observed that all four dry  docks were occupied with repair work.  We expect ship repair revenue to  increase by c.50% from S$642m in FY12 (c.14% of SMM?s revenue) to  c.S$1bn in FY14.

There are no changes to our FY13-15 EPS and target price (14x CY14 P/E, 10% below the O& M industry?s mid-cycle).

What Happened
We visited phase 1 of SMM?s new integrated yard in Tuas, West Singapore today. The yard started operations in Aug 2013.

The 73ha yard is equipped with four very large crude carrier (VLCC) dry docks, with total capacity of 1.55m DWT and quay  space of more than 3.8km.

The new yard will nearly double SMM?s current repair, conversion and offshore capacity of 1.9m DWT. The estimated current utilisation rate ofthe yard is about 70%, with all four dry docks occupied with repair jobs.

More ships are expected to be progressively rerouted to the yard  from Pulau Samulun (Jurong Shipyard?s main repair facility).

Phase2 of SMM?s integrated yard (34.5ha) will take another four to five years to develop. Total capex for phase 1 was about S$900m, which is higher than the original target of S$750m as certain building works (such as the dormitory) were brought forward. 

1. Sembcorp Marine is one of the two biggest oil-rig makers in the world ? the other being another Singapore-based company ? Keppel Corporation (SGX: BN4).
2. Sembcorp Marine?s shares have jumped six-fold  over the last decade while the Straits Times Index (SGX: ^STI) only managed to double in the same time  period.
3. Sembcorp Marine started life as Jurong Shipyard Ltd ? a joint venture between the Government of Singapore and Ishikawajima Harima Heavy Industries Co. Ltd of Japan.

Chart of the Day: Singapore shipyards bask in 89% jump in newbuild deals

While we expect the recovery path to be a long and bumpy one, we observed early signs of recovery, led by contract awards. 

Industry orders for vessels surged 89% y-o-y to 73m dwt in 8M13, and looks set to surpass 2011?s 84m dwt.

Enquiry levels at the yards are strong, and we could expect more orders to flow through in the coming months as the financially sound shipping companies take advantage of the low newbuild prices, incentivized by recent spike in BDI. 

Why Sembcorp Marine is well poised for more unit deals with Helix

The contract price is 10% lower than the first one (US$385.5m) secured in Mar-2012, as it is a smaller unit.

While the first unit is built based on Bassoe Technology's naval architectural design, the second one will be based on a design jointly developed by SMM's R& D arm - Sembcorp Marine Technology Pte Ltd, and Helix.

With the joint design, we believe SMM is poised to secure more of such units from Helix in the future. 

Sembcorp Marine's 2013 order win projected to hit a whopping $4.5b

The DP3 semisub, to be named Q7000, is based on a design jointly developed by SMM and Helix. It is scheduled for delivery in mid-2016. 

As SMM?s new order is likely to beat our initial expectation of SGD4.0bn for 2013, we raise our order win forecast to SGD4.5bn, which accordingly results in a 4% upward revision in our FY15F EPS. 

The start of operation of SMM?s new yard in Tuas will add significant capacity to the group and drive the next level of productivity gains. The new yard will carry out repair works while the Jurong shipyard will focus on newbuilds. 

3 compelling reasons for buying into Singapore rig builders

We upgrade to OVERWEIGHT Singapore?s rig builders, which have underperformed the STI due to concerns over rising competition and consensus earnings downgrades. We turn positive as: i) the potential recovery in shipbuilding orders and tightening credit may ease competition for offshore orders, ii) the risk of EPS downgrades declines, and iii) valuations look appealing as we roll forward to FY14 earnings. We prefer SMM over KEP and SCI.

Return of ship orders could ease competition. Data from Clarksons indicate that newbuild prices and new orders are improving. We are of the view that the revival of shipbuilding orders will divert the attention of South Korean and Chinese mega yards toward seeking ship orders rather than offshore orders, thus bringing some relief to the intense competition in the offshore market.

Tighter yard capacity could boost pricing power. Dalian Shipyard has secured orders for nine jackup YTD, of which eight are from Seadrill and one from PT Apexindo. These are due to be delivered between 2Q15 and 3Q16. We believe Dalian has largely filled its near-term slots. As other Chinese yards jostle to win the confidence of blue chip customers and credit conditions imposed on the weaker yards tighten, we believe the pricing power of Singapore shipyards may improve.

Lower risk of EPS estimates downgrades after huge cuts. We previously argued that street EPS expectations for FY13 and FY14 had been too bullish and may lead to downward revisions. Since Nov 2012, consensus has cut EPS estimates for KEP, SMM and SCI by 5%, 23% and 13% respectively. As we believe the earnings downgrades for rig builders are close to the bottom, their downside risks are now lower.

Positive earnings pace heading into FY14. Rig builders saw earnings decline in 1H13 as operating margins normalised. We expect their earnings momentum to swing back to positive growth in FY14.

Prefer SMM over KEP and SCI. We believe SMM (BUY, TP: SGD5.60) is a more leveraged play to the positive outlook. The key risks to our view are: i) expansion in rig building capacity by Chinese state-owned yards, ii) a  steep drop in crude oil prices, and iii) execution risks in Brazil.