Sembcorp Marine sees profits drop

SMM’s maiden win for FY13, for which we have assumed

order wins of S$5bn for the full year.

 

latest $900m win revenue recognition will b in 2014...margin will continue to be squeezed

Long lead timefor latest win (CIMB)

The latest S$900m platform contract may not contribute significantly in the near term given the long lead time forconstruction and delivery. The share price upside is limited as current valuations appear rich at 14x CY14, close to the offshore & marine’s mid-cycle of 15x.

Maintain Neutral.We keep our EPS and target price, still based on 15x CY14P/E orits 10-year average. The current order fallswithin our S$4.5bn expectationfor 2013. We see potential re-rating catalysts coming from stronger-than-expected margins and order wins.

What Happened

Sembmarine’s SMOE secured a S$900m letter of intent from Norwegian Det norske oljeselkap ASA for an EPC contract to build an offshore platform integrated topside for the North Sea Norwegian sector. For this project, SMOE will work with its engineering partner, Wood Group Mustang.Construction will start in Dec 13,with completion expected in Mar 16.

What We Think

We believe material revenue recognition will only start after 1H14,given the long lead time forconstruction and delivery. We estimate the EBIT margin for the contract to be about 10%. The latestcontract value is much larger than theS$600m contract secured by SMOE in Jul 11 from PTTEP for an integrated processing and living quarters platform. It is also almostdouble the value ofits previous Norwegian Ekofisk accommodation topside secured in Mar 10 at S$550m. We believe there could be some revenue sharing withMustangfor the latestcontract.

Our S$4.5bn target is 35% above Sembmarine’s 2012 non-Brazilian contracts amounting to S$3.3bn. Sembmarine has outstanding options worth aboutUS$1.5bn, including three semi-subaccommodation units (US$295m each),and four modules and modules integration for a FPSOfor Petrobras (estimated at US$675m).With the latestNorwegian contract in the bag, Sembmarine needs another S$3.6bn to meet our target.

What You Should Do

The share price will react positively to this news.However,current valuations are not compelling in light of thedeclining margins and earnings deterioration in FY13.

SINGAPORE : Singapore rigbuilders Keppel Offshore & Marine (O& M) and Sembcorp Marine have secured a slew of contracts this year.

Analysts have said the two companies could see another strong set of orders in 2013, driven by robust demand for ultra-deepwater rigs.

Keppel O& M booked about US$8 billion worth of contracts this year - its second highest on record.

This follows a record S$10 billion worth of contracts which Keppel O& M secured in 2011.

Keppel O& M said over 65 per cent (US$5.36 billion) of the orders in 2012 came from Brazil.

Looking ahead, Keppel said it is developing a new product that will enable drilling in deeper and harsher environments.

Tong Chong Heong, chief executive officer of Keppel Offshore & Marine, said: " There are also new frontiers, new areas where more rigs are required, and with the emergence of areas such as the Caspian, Black Sea, Mexico and many parts of Southeast Asia, demand for rigs has gone up."

Keppel O& M along with Sembcorp Marine are big players in the offshore rig building industry, accounting for some 70 per cent of the global market share for jack-up rigs.

Analysts said the growing demand for ultra-deepwater drilling vessels and equipment will continue to support business growth.

Low Pei Han, investment analyst at OCBC Investment Research, said: " O& M companies have seen very good order books, Keppel and Sembcorp Marine each secured about 10 billion dollars worth of orders this year. About 50 per cent of each came from Sete Brasil and Petrobras, which is what the market had more or less anticipated.

" Going into 2013, we expect Sete Brasil and Petrobras orders to remain about the same level as this year, which will be about S$4 billion to S$5 billion."

But the Singapore rigbuilders are likely to face stiffer competition from Korean and Chinese companies.

Analysts said some Chinese shipbuilders are offering similar products at a 20 per cent discount.

For example, earlier this month, Yangzijiang secured a US$170 million order for a jack-up rig, while a similar contract at Keppel O& M cost US$205 million.

According to the China Association of the National Shipbuilding Industry, China hopes to capture 20 per cent of the global market for rigs, production facilities and offshore products by 2015.

But some analysts said Singapore rig builders are not likely to lose their competitive edge anytime soon.

Janice Chua, head of equity research (Singapore) at DBS Vickers, said: " It is a tall order for the Chinese yards to try and get the global market share for rigs.

" In order for the Chinese yards to have a bigger market share globally, what is more important is the soft skills of project management, engineering, design expertise, as well as ensuring that they can deliver the projects on time and according to the clients specification. That will take at least three years to build for any of these offshore structures."

Increasing shale gas production in the US could also present a new competitive landscape for rigbuilders.

Jason Waldie, associate director at Douglas Westwood, said: " The wild card here is whether the US is going to export, or how much the US is going to export.

" Certainly I know the US government is planning to export a very good share of its gas to the market. Now what impact does that have for the yards?"

Analysts expect the demand for rigs to come under some pressure should the US decide to export a substantial amount of shale gas.

- CNA/ms