SembCorp Marine - More to come; raising PT to S$3.75

2Q09 earnings came in 15% better than expected on margin expansion: Sembcorp Marine reported a recurring 2Q09 net profit of S$145.2 million (reported earnings of S$138.1 million, up 7.6% y/y), better than our estimate of S$126 million, and up 13.2% y/y. The key reason for the outperformance was the continued expansion of the operating margin to 11.1% in 2Q09 from 8% in 2Q08 driven by operating efficiencies and lower costs. Management also announced a new FPSO conversion contract for S$163 million, taking YTD contracts to S$1.1 billion. As a result we raise FY09E/10E/11E new order contracts by S$800 million/$500 million/$500 million.

Multi-yard strategy in place to take advantage of Petrobras pipeline; are more contracts in the offing? During the analyst briefing, management highlighted the potential use of a multi-yard strategy while undertaking work for Petrobras. Besides its previous and current partners of MacLaren and Maua (with whom SMM could look to undertake new-build and conversion work), management highlighted its intention to consider yard acquisition in Brazil (Upstream had earlier reported a possible greenfield yard being evaluated by SMM). Management highlighted that while rig enquiries are lower, the quality of these enquiries is much higher. Moreover, with the FPSO conversion win and Sea Dragon contract, we could see (a) more production-assetrelated projects, and (b) further transfer of rig work from other yards.

We raise FY09E/10E/11E EPS by 4.7%/7.9%/9.5%, and our SOTPbased Jun-10 PT to S$3.75: We raise our EPS estimates due to (a) higher projected order wins, (b) raising operating margins to 10.5% (from 10.3%), and (c) incorporating recent order wins. We still see upside risks to our FY09/10 estimates on margin enhancement. As a result of our revised assumptions, and rolling forward our timeframe to Jun-10, our SOTP-based PT rises to S$3.75. Current implied O&M P/S stands at 11.9x (versus the historic average of 16-17x). A key risk to our PT is worse-than-expected delays by PBR for orders.

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