SembCorp Marine OIR

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					 SINGAPORE Company Update Results
  SINGAPORE   Company Update                                                                                                              MITA 019/06/2011
                                                                                                                                       MITA No. No. 010/06/2009

6 September 2011
Maintain
                                                                                                   SembCorp Marine Ltd
BUY
Previous Rating: BUY                                                                                Underpinned by still strong fundamentals
Current Price:                                                            S$3.81
Fair Value:                                                               S$5.70
                                                                                                   Uncertainty in the market... Aug will be marked as the month
                                                                                                   in 2011 when heightened risk aversion in equity markets drove
   3500                       STI                                                     6.5
                                                                                                   prices down, impacting high-beta stocks such as Sembcorp
                                                                                      5.5          Marine (SMM). Though the fall in SMM's share price is
   3000
                                                                                      4.5          understandable with the negative market sentiment and
   2500
                                                      SembCorp                        3.5          correction in oil prices, the stock looks over-sold at current
   2000                                                 Marine                                     levels, trading at 11x forward P/E - one standard deviation
                                                                                      2.5
   1500                                                                               1.5          below its five-year historical mean of 16x. The last time SMM
   1000                                                                               0.5          was trading at this level was in early Oct 08, while its lowest
                                                        May-11




                                                                                                   point was 5.5x, also in the same month (Exhibit 2).
                     Nov-10




                                             Mar-11
            Sep-10




                                    Jan-11




                                                                 Jul-11

                                                                             Sep-11




                                                                                                   ... but not in the industry, yet. Though there is no escaping
                                                                                                   the cyclical macro downtrend, the main driver of the offshore
                                                                                                   oil and gas industry still boils down to the level of oil price
Reuters Code                                                                SCMN.SI                which is still hovering above the US$75/bbl threshold that will
ISIN Code                                                                             S51          sustain most capital expenditure in deeper water projects.
Bloomberg Code                                                              SMM SP                 Day rates for premium jack-up rigs (which SMM has been
Issued Capital (m)                                                               2,083             receiving orders) have been increasing, in contrast to lower
Mkt Cap (S$m/US$m)                                               7,935 / 6,613
                                                                                                   spec rigs (Exhibit 4). We have also collated recent comments
                                                                                                   from SMM's key customers, and according to established
Major Shareholders
                                                                                                   players such as Seadrill, the market for premium jack-up rigs
SembCorp Industries                                                              60.8%
                                                                                                   continued to show improvement with strong interest from
Free Float (%)                                                                   38.0%             customers, increased tendering activity and upward trends in
Daily Vol 3-mth (‘000)                                                           7,044             day rates in most regions. This is because oil companies
52 Wk Range                                                      3.620 - 5.840                     remain attracted to the safety and efficiency gains offered by
                                                                                                   newer and high spec jack-up rigs. That said, oil prices still
                                                                                                   depend on the health of the global economy, for the demand
                                                                                                   of oil rests on the consumption growth of major economies.
                                                                                                   Increasing risks of a US economic recession and the paralysed
(S$m)                           FY09                  FY10         FY11F               FY12F       state of affairs in the EU give investors good reason to stay at
Revenue                       5,724.7            4,554.9          4,286.8             5,609.9      the sidelines for now.
Gross Profit                   986.1             1,128.8              978.3           1,009.8
P/NTA (x)                           4.2                3.1                 3.1               2.6   Still optimistic about new order wins. SMM has met about
PER (x)                         11.3                   9.2                11.5              11.1   60% of our full year new order estimate of S$4.5b, but we
EPS (cts)                       33.8                  41.4                33.1              34.4
                                                                                                   remain optimistic about new order wins, underpinned by still
                                                                                                   strong fundamentals of the offshore industry. Besides jack-
                                                                                                   ups, the group is also looking at both fixed and floating
                                                                                                   production units for potential work. However, with the
Low Pei Han                                                                                        unfavourable macro set-up for cyclicals, we have lowered our
(65) 6531 9813
                                                                                                   peg for SMM's operations (ex- Cosco) to 14x blended FY11/
e-mail: LowPH@ocbc-research.com
                                                                                                   12F earnings (prev. 16x) and updated the market value of Cosco
                                                                                                   Corp, hence reducing our fair value estimate to S$5.70 (prev.
                                                                                                   S$6.30). Maintain BUY.




Please refer to the important disclosures at the back of this document.
SembCorp Marine Ltd




Exhibit 1: Comments from SMM's key customers (undelivered rigs)
Client                 Base        Recent comments                                                                                                                                       Source
                                   1) Utilisation and tendering pace of both
                                   standard and premium jackup rigs increasing                                                                                                           Company presentation,
Transocean             Texas, US
                                   2) Midwater market improving                                                                                                                          30 Aug 2011
                                   3) Deepwater demand seen increasing in 2H11
                                   1) Contracting activity has improved
                                   significantly over the course of the year                                                                                                             Company's 2Q11 results,
Seadrill               Norway
                                   2) Sees sound demand for premium drilling units                                                                                                       25 Aug 2011
                                   3) Tight market for modern drilling assets

                                   1) Day rates continue to improve for floater market;
                                   approaching S$500k/day for ultra-deepwater
                                   2) Recent Petrobras ultra-deepwater rig tenders should                                                                                                Company presentation,
Atwood Oceanics        Texas, US
                                   lead to additional contract awards                                                                                                                    31 Aug 2011
                                   3) Deepwater permitting and exploration plan approvals
                                   aiding Gulf of Mexico recovery prospects
                                   1) Continues to see an increase in deepwater                                                                                                          Company press release,
Noble Corp             Texas, US
                                   demand, both near and longer-term                                                                                                                     1 Sep 2011
                                   1) Sees rig market tightening in SE Asia                                                                                                              Upstream "Spec
Songa Offshore         Cyprus      2) Taking a cautious stance on further expansion without                                                                                              newbuilds off Songa menu", 2
                                   firm contracts                                                                                                                                        Sep 2011
Source: Various, OIR




                                       Exhibit 2: SMM trading at 1 s.d. below its five-year historical mean P/E

                                                     35                                                                                                                                                                                             7

                                                                                                        F orward P/E
                                                     30                                                                                                                                                                                             6
                                                                                                                                                                                                   S hare price
                                                     25                                                                                                                                                                                             5
                                                                                                                                                                                                                                +1 s.d.
                                                                                                                                                                                                                                                        Sh are price (S$)




                                                     20                                                                                                                                                                                             4
                                           P/E (x)




                                                     15                                                                                                                                                                                             3

                                                                                                                                                                                                                                -1 s.d.
                                                     10                                                                                                                                                                                             2


                                                      5                                                                                                                                                                                             1


                                                      0                                                                                                                                                                                             0
                                                                                      Jun 07




                                                                                                                                                              Jun 09




                                                                                                                                                                                                    J un 10




                                                                                                                                                                                                                                           Jun 11
                                                          S ep 06

                                                                    Dec 06




                                                                                               Sep 07
                                                                                                        Dec 07

                                                                                                                 Mar 08

                                                                                                                          Jun 08
                                                                                                                                   Sep 08

                                                                                                                                            Dec 08
                                                                                                                                                     Mar 09




                                                                                                                                                                                Dec 09

                                                                                                                                                                                          Mar 10



                                                                                                                                                                                                              Sep 10

                                                                                                                                                                                                                       Dec 10
                                                                                                                                                                                                                                  Mar 11
                                                                             Mar 07




                                                                                                                                                                       Sep 09




                                       Source: Bloomberg, OIR




Page 2                                                                                                                                                                                                        6 September 2011
SembCorp Marine Ltd




                      Exhibit 3: Performance of various FTSE indices
                               20


                               10


                                   0


                             -10


                                                    FSSTI Index
                             -20
                                                    FSTOG Index
                                                    FSTRE Index
                             -30                    FSTFN Index
                                                    FSTCG Index
                                                    FSTTC Index
                             -40
                                                    FSTIN Index
                                                    FSTAM Index
                             -50                    FSTBM Index
                                                    FSTCS Index
                             -60
                                       Jan 11


                                                Jan 11


                                                             Jan 11




                                                                                                                                                                             Jun 11


                                                                                                                                                                                               Jun 11


                                                                                                                                                                                                          Jul 11


                                                                                                                                                                                                                   Jul 11
                                                                               Feb 11


                                                                                        Feb 11


                                                                                                   Mar 11


                                                                                                                     Mar 11


                                                                                                                               Apr 11


                                                                                                                                         Apr 11


                                                                                                                                                           May 11


                                                                                                                                                                    May 11




                                                                                                                                                                                                                                     Aug 11


                                                                                                                                                                                                                                                 Aug 11


                                                                                                                                                                                                                                                          Aug 11
                      Source: Bloomberg, OIR




                      Exhibit 4: Day rates for jackup rigs (independent cantilevered) that can
                      operate in various water depths (ft)

                                   200,000
                                                                               Jackup IC <250                                 Jackup IC 250
                                   180,000
                                                                               Jackup IC 300                                  Jackup IC 300+

                                   160,000

                                   140,000

                                   120,000
                         US$/day




                                   100,000

                                       80,000

                                       60,000

                                       40,000

                                       20,000

                                                0
                                                    Sep 00



                                                                      Sep 01



                                                                                          Sep 02



                                                                                                            Sep 03



                                                                                                                                Sep 04



                                                                                                                                                  Sep 05



                                                                                                                                                                    Sep 06



                                                                                                                                                                                      Sep 07



                                                                                                                                                                                                        Sep 08



                                                                                                                                                                                                                            Sep 09



                                                                                                                                                                                                                                              Sep 10




                      Source: Rigzone, Bloomberg, OIR




Page 3                                                                                                                                                                                                  6 September 2011
SembCorp Marine Ltd




                                                    Exhibit 5: Sum-of-the-parts valuation for SMM
                                                                               Profit after tax/ Mkt cap   Stake    Valuation type         Multiple Value to SMM Valuation/share

                                                                                        (S$m)                                                (x)           (S$m)          (S$)
                                                     SMM ex Cosco              $                  665      100% FY11/12F earnings            14            9,307          4.47
                                                     Cosco Shipyard Group      $                  127       30% FY11/12F earnings            13             495           0.24
                                                     Cosco Corp Singapore      $                2,295      4.97%    Mkt cap                                 114           0.05
                                                     Net cash                  $                1,948                                                      1,948          0.94
                                                     Shares outstanding (m)                                                                                               2083
                                                     SOTP valuation (S$)                                                                                                  5.70




Sembcorp Marine's Key Financial Data

EARNINGS FORECAST                                                               BALANCE SHEET
Year Ended 31 Dec (S$m)                FY09      FY10     FY11F      FY12F      As at 31 Dec (S$m)                              FY09               FY10       FY11F        FY12F

Revenue                               5,724.7   4,554.9   4,286.8    5,609.9    Cash and cash equivalents                    1,978.5           2,915.1       2,167.7       2,793.5
Gross profit                           986.1    1,128.8    978.3     1,009.8    Other current assets                         1,539.3               985.1     1,427.5       1,840.0
Operating and admin expenses           -123.7    -186.2    -154.9     -182.0    Property, plant, and equipment                 678.4               681.9       796.3        906.0
EBITDA                                 937.6    1,025.8    907.0       925.5    Total assets                                 4,687.5           5,279.2       5,128.3       6,387.8
Operating profit                       862.4     942.6     823.4       827.8    Debt                                             30.9                8.0       220.0        400.0
Other expenses/income                   19.9      77.7       34.6       67.8    Current liabilities excluding debt           2,623.3           2,440.8       2,084.1       2,619.3
Associates                              25.4      57.6       51.3       47.5    Total liabilities                            2,727.1           2,592.2       2,439.2       3,154.4
Pre-tax profit                         907.6    1,077.9    909.2       943.2    Shareholders equity                          1,884.1           2,599.4       2,545.0       3,032.6
Profit for the year                    756.8     893.9     745.5       773.4    Total equity                                 1,960.4           2,686.9       2,689.1       3,233.4
Profit attributable to shareholders    700.1     860.3     688.9       716.8    Total equity and liabilities                 4,687.5           5,279.2       5,128.3       6,387.8



CASH FLOW
Year Ended 31 Dec (S$m)                FY09      FY10     FY11F      FY12F      KEY RATES & RATIOS                              FY09               FY10       FY11F        FY12F

Op profit before working cap. chang    960.5    1,044.5    907.0       925.5    Earnings per share (S cents)                     33.8               41.4           33.1          34.4
Working cap, taxes and int             -546.7    235.1     -803.1      -54.7    NTA per share (S cents)                          90.7              124.7       121.9        144.3
Net cash from operations               413.7    1,332.2    103.9       870.8    Gross profit margin (%)                          17.2               24.8           22.8          18.0
Purchase of PP&E                        -67.0     -73.2    -200.0     -200.0    Net profit margin (%)                            13.2               19.6           17.4          13.8
Other investing flows                     6.4       0.8     -78.7        0.0    PER (x)                                          11.3                9.2           11.5          11.1
Investing cash flow                     -60.6     -72.3    -278.7     -200.0    Price/NTA (x)                                        4.2             3.1            3.1           2.6
Financing cash flow                    -428.7    -323.4    -572.6      -44.9    EV/EBITDA (x)                                        8.5             7.7            8.7           8.6
Net cash flow                           -75.5    936.5     -747.4      625.8    Dividend yield (%)                                   3.9             9.4            2.9           2.9
Cash at beginning of year             2,054.0   1,978.5   2,915.1    2,167.7    ROE (%)                                          40.2               34.4           29.3          25.5
Cash at end of year                   1,978.5   2,915.1   2,167.7    2,793.5    Net gearing (%)                             Net cash         Net cash Net cash            Net cash

Source: Company data, OIR estimates




Page 4                                                                                                                                       6 September 2011
SembCorp Marine Ltd




SHAREHOLDING DECLARATION:
The analyst’s immediate family owns shares in the above security.


RATINGS AND RECOMMENDATIONS:
OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and trading
oriented.
- However, OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month
investment horizon. OIR’s Buy = More than 10% upside from the current price; Hold = Trade within +/-10%
from the current price; Sell = More than 10% downside from the current price.
- For companies with less than S$150m market capitalization, OIR’s Buy = More than 30% upside from the
current price; Hold = Trade within +/- 30% from the current price; Sell = More than 30% downside from the
current price.
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                                                                                      Carmen Lee
Published by OCBC Investment Research Pte Ltd                                       Head of Research


Page 5                                                                                     6 September 2011

				
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