Better-than-expected margins. SCM turned in better-than-expected operating profit margin in 1Q09 for the third consecutive quarter. We opine that this ascertains SCM’s capability and efficiency for rigbuilding as the first quarter is a seasonally slow quarter for higher-margin shiprepair and thus, the revenue profile for the first quarter is skewed towards rigbuilding. We expect subsequent quarters to record better profit margins than 1Q09. Increasing ROE track record. SCM’s ROE has consistently trended up from FY02. We believe this demonstrates its commitment towards delivering returns.
SCM is currently trading at a P/E of 11.0x/11.7x on FY09F/FY10F EPS. Given the slightly clearer outlook ahead, SCM’s trading valuation looks inexpensive, compared to its mid cycle historical P/E band of 16x, backed by its record backlog orders and quality deliverables. We derive our target price of S$3.04 (from S$3.02 previously) based on sum-of-the-parts valuation. We value SCM based on
• P/E of 16x FY10F earnings for its niche rig building/repair business sector
• SCM’s 30% stake in Cosco Shipyard Group (CSG)
• 4.98% equity interest of Cosco Corp’s share at Cosco’s Target Price of S$1.14. (based on our revised fair value estimate for Cosco)
• Applying a 15% discount, considering the near term risk from its customer.
Maintain BUY.
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