Sembcorp Marine - Strong operating performance

Sembcorp Marine's 1H09 revenues were up 24% yoy to S$2,861m, while net income grew 17.6% to S$258m (about 53% of our full-year estimates). Gross margins were up from 9.9% in 2Q08 to 12.9% in 2Q09; on a half-yearly basis; they rose from 10.2% in 1H08 to 11.8% in 1H09. Operating profits surged 58% yoy to S$301m in 1H09 (up 50% yoy to S$167m in 2Q09). As valuations remain attractive, we maintain Buy.

As we have highlighted before, two key conditions are required for a sustained recovery of the sector: (1) improvement/stability in oil prices, and (2) easing of credit. At current oil prices, investments previously put on hold are now beginning to return. We also see incremental signs/examples that suggest substantial easing of credit in the O&M sector.

The alarming rate of decline of global oil reserves, as highlighted by the IEA, is prompting countries such as Mexico to aggressively step up spending within the industry to halt this decline. We expect more countries to follow suit in the long term. We believe SMM is well positioned to benefit from this trend, having built up its branding and execution track record over the years. SMM has announced a new S$160m FPSO conversion contract, bringing YTD new orders to S$1.12bn.

SMM has a strong net cash position of S$1.84bn (S$1.18bn in progress payments), which places it well for potential M&A activities. Our SOTP-based target price is S$3.80 (target multiple of 15x FY09E earnings for O&M business; market/implied values for Cosco). Risks: unexpected cost escalation, execution risks, foreign currency volatility, and a sustained plunge in oil prices.

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