Singapore | Industrials

Asia Pacific Equity Research

SEMBCORP MARINE | BUY

MARKET CAP: USD 8.2B AVG DAILY TURNOVER: USD 26M 3 Aug 2012 Company Update

EXPECTING MORE IN 2H12

Soft results not a surprise Expect better performance in 2H12 Seeing enquiries across the board

BUY (maintain)
Fair value add: 12m dividend forecast versus: Current price 12m total return forecast S$5.69 S$0.18 S$4.88 20%

Soft 2Q12 results but not a surprise Sembcorp Marine (SMM) reported a 46.4% YoY rise in revenue but saw a 4.6% fall in net profit to S$142.8m in 2Q12, such that 1H12 net profit accounted for about 40% of both ours and the streets full year estimates. Operating margin improved from 12.8% in 1Q12 to 13.1% in 2Q12 but was lower compared to 2Q11 which registered a high margin of 21.6%. We had noted in our earlier report More going for SMM in 2H12 (27 Jun 2012) that we expect SMMs earnings to pick up in 2H12 as higher margin contracts contribute to the groups results. Still sticking to earlier margin guidance The group is still striving to achieve its earlier guidance of 14-15% operating margin for the full year (including work for Petrobras) and we think SMM is likely to see higher margins in the later quarters as more projects go beyond initial recognition phase and better margin contracts are recognized. Meanwhile, management also highlighted that excluding foreign exchange losses, operating margin would have been 13.9% in 2Q12 and 13.8% in 1H12. Enquiries across the board Enquiries for newbuilds remain healthy and the group is seeing interest for various products, such as semi-submersibles, jack-ups and FPSOs. There are serious enquiries from customers which are expected to add to the groups current order book of S$6.6b (vs. S$5.1b as at end 2011) with deliveries extending till 2Q15. Integrated new yard starts contributing in 2013 Management also reported that construction of its new integrated yard in Singapore is progressing well and operations at two of its docks may start as early as 2Q13 while docks 3 and 4 may commence in early 2H13. Meanwhile, we tweak our estimates and update the market value of Cosco Corp in our SOTP valuation. As such, our fair value estimate slips slightly from S$5.71 to S$5.69. Maintain BUY.

Analysts Low Pei Han (Lead) +65 6531 9813 lowph@ocbc-research.com Chia Jiun Yang +65 6531 9809 chiajy@ocbc-research.com

Key information Market cap. (m) Avg daily turnover (m) Avg daily vol. (m) 52-wk range (S$) Free float (%) Shares o/s. (m) Exchange BBRG ticker Reuters ticker ISIN code GICS Sector GICS Industry Top shareholder S$10,186 / USD8,153 S$32 / USD26 7.8 2.9669 - 5.3113 38.4 2,087.4 SGX SMM SP SCMN.SI S51 Industrials Machinery Sembcorp Industries60.8% 1m -1 -6 3m -4 -6 12m -3 -2

Relative total return Company (%) STI-adjusted (%) Price performance chart
Shar e Pr i ce (S$ ) 6.98 6.10 5.23
`

Index Level 4600 4020 3440 2860 2280 1700 Nov-11 Feb-12 May-12

4.36 3.49 2.62 Aug-11

Fair Value

SMM SP

FSSTI

Sources: Bloomberg, OIR estimates

Key financial highlights Year Ended 31 Dec (S$m) Revenue Gross profit Operating and admin expenses Profit attributable to shareholders Earnings per share (S cents) Cons. EPS (S cts) Gross profit margin (%) Net profit margin (%) ROE (%) Price/NTA (x) FY10 4,554.9 1,128.8 -186.2 860.3 41.5 na 24.8 19.6 34.4 3.9 FY11 3,960.2 866.1 -129.0 751.9 36.1 na 21.9 19.4 31.9 4.3 FY12F 4,769.6 882.4 -166.8 624.1 29.9 31.6 18.5 13.4 25.4 4.1 FY13F 6,971.2 1,115.4 -183.0 795.4 38.1 35.5 16.0 11.7 27.7 3.5

Industry-relative metrics
P er c ent i l e 0t h 25t h 50t h 75t h 100t h

M k t Cap B et a ROE PE PB

Company

I ndust r y A v er age

Note: Industry universe defined as companies under identical GICS classification listed on the same exchange. Sources: Bloomberg, OIR estimates

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

MICA (P) 035/06/2012

OCBC Investment Research Singapore Equities

Exhibit 1: Quarterly financial highlights

2Q11 Ship repair Rig building Ship conversion / offshore Others Total revenue Cost of Sales Gross profit Other operating income Other operating expenses Admin costs Profit from operations Financial income Financial costs Share of associates Profit before income tax Income Tax Profit after tax Minority Interests PATMI (S$m) 179.1 664.3 364.1 9.5 1,217.0 -1,020.9 196.1 5.4 -6.9 -34.7 159.8 12.3 -0.9 15.4 184.0 -33.8 150.2 -7.4 142.8 2Q12 (S$m) 164.6 399.7 258.6 8.4 831.3 -634.4 196.9 3.2 -9.5 -31.8 158.8 6.2 -0.6 16.6 181.3 -29.8 151.5 -1.8 149.7 % Chg (YoY) 8.8% 66.2% 40.8% 13.1% 46.4% 60.9% -0.4% 68.6% -26.5% 9.0% 0.6% 99.3% 43.7% -7.4% 1.5% 13.5% -0.8% 324.9% -4.6% 1Q12 (S$m) 142.6 393.4 401.0 5.6 942.6 -785.5 157.1 9.5 -11.9 -34.5 120.2 10.2 -0.6 13.7 143.5 -26.6 116.9 -3.8 113.1 % Chg (QoQ) 25.6% 68.9% -9.2% 69.6% 29.1% 30.0% 24.8% -42.8% -41.7% 0.7% 33.0% 20.1% 33.4% 12.2% 28.2% 27.1% 28.5% 94.6% 26.3%

Sources: Company financials

Still sticking to earlier margin guidance The group is still striving to achieve its earlier guidance of 14-15% operating margin for the full year (including work for Petrobras) and we think SMM is likely to see higher margins in the later quarters as more projects go beyond initial recognition phase and better margin contracts are recognized. SMM is currently executing orders secured in late 2010 which generally had lower margins due to the competitive environment then. Recall that average selling prices of units subsequently increased from then onwards. Although equipment prices also rose in tandem, the increase was only by single digits in percentage terms and hence we expect an overall improvement in margins for SMM for later contracts.

Exhibit 2: Trends in gross and operating profit margins

1200
Operating profit Gross profit

30

1000

24.8 21.9 18.5 17.2 20.7 18.6 15.1 15.0 9.1

Operating profit margin Gross profit margin

25

800

20

S$m

12.9 8.0 8.3 7.7 6.4 9.9

400

10

200

5.9

0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12F

Source: Company, OIR

600

15

OCBC Investment Research Singapore Equities

Exhibit 3: New contracts secured (ex-ship repair)

6,000
Conversion/offshore

399 5,000 1,147 4,000 411 2,909 1,616 S$m 3,000 2,089 545

Semi-subs Jack ups Ship building Offshore platform

693 556

Drillship

983

2,000

1,009 2,085 1,119 1,802 292 1,697 492 601 335 FY04 FY05 FY06 265 FY03 1,534 581 FY07 548 FY08 723 230 FY09 550 FY10 780 FY11 804 79 FY12 1,935 1,875 1,196

1,000

Source: Company, OIR

Exhibit 4: Net order book (ex- ship repair)

10,000
Drillship

9,000 8,000 7,000 6,000 S$m 5,000 4,000 3,000 2,000 1,000 0 584 77 192 FY03

Conversion/offshore & platforms Semi-subs Jack ups Ship building

1,819

1,536 948 2,692 2,033 2,198 3,463 1,212 2,018 589 6 FY07 2,240 2,726 2,991 1,642 871 FY05 FY06 FY08 FY09 FY10 FY11 4,209 1,206 1,835 1,285 486 1,491 2,775

983 1,381

992

1,579

2,634

FY04

FY12

Source: Company, OIR

Construction of new yards progressing well Management also reported that construction of its new integrated yard in Singapore is progressing well and operations at two of its docks may start as early as 2Q13 while docks 3 and 4 may commence in 2H13. Detailed engineering for its Brazilian yard has also completed and it is currently in the construction phase. Ground is now being leveled to the correct sea level height and SMM has performed a pre-recruitment exercise in search of Brazilian staff. We have modeled in a capex assumption of S$600-700m for 2012 (mainly for the Singapore yard) and S$600m for 2013 (more for Brazilian yard).

OCBC Investment Research Singapore Equities

Ship conversion and offshore may see record year The groups ship conversion and offshore division is likely to see a record year in terms of revenue as it has booked in S$765m of turnover in 1H12 vs 2011s S$1.1b revenue. Three projects were completed in 1H12 while six are currently under work-in-progress, along with three more in the planning and engineering stage.
Exhibit 5: Ship conversion and offshore projects
No. completed at 1H12 3 DP 3 Heavy lift pipelay vessel, Borealis BW Joketole FPSO conversion FSRU conversion, West Java Ekofisk accommodation topside Petrojarl Cidade de Itljal FPSO conversion RV Investigator ROPAX vessel conversion to DP2 accom & repair vessel Integrated processing & living quarters platform OSX-3 FPSO conversion LNG facility in Australia FSO conversion, Banyu Urip Wellhead platforms, offshore Indonesia

No. in WIP stages

In planning & engineering

Source: Company, OIR

OCBC Investment Research Singapore Equities

Company financial highlights

Income statement Year Ended 31 Dec (S$m) Revenue Gross profit Operating and admin expenses EBITDA Operating profit Other expenses/income Associates Pre-tax profit Profit for the year Profit attributable to shareholders

FY10 4,554.9 1,128.8 -186.2 1,025.8 942.6 77.7 57.6 1,077.9 893.9 860.3

FY11 3,960.2 866.1 -129.0 823.4 737.1 59.9 62.9 859.9 769.1 751.9

FY12F 4,769.6 882.4 -166.8 842.4 715.5 17.8 45.2 778.5 638.4 624.1

FY13F 6,971.2 1,115.4 -183.0 1,126.9 932.4 14.7 45.2 992.3 813.7 795.4

Balance sheet As at 31 Dec (S$m) Cash and cash equivalents Other current assets Property, plant, and equipment Total assets Debt Current liabilities excluding debt Total liabilities Shareholders equity Total equity Total equity and liabilities

FY10 2,915.1 985.1 681.9 5,279.2 8.0 2,440.8 2,592.2 2,599.4 2,686.9 5,279.2

FY11 1,989.6 1,409.3 1,034.3 5,051.6 48.8 2,365.1 2,545.6 2,414.3 2,506.1 5,051.6

FY12F 1,567.3 1,564.4 1,586.0 5,364.2 300.0 2,308.3 2,740.0 2,518.1 2,624.2 5,364.2

FY13F 1,532.6 2,286.5 2,037.5 6,534.5 400.0 2,940.7 3,472.3 2,937.8 3,062.2 6,534.5

Cash flow statement Year Ended 31 Dec (S$m) Op profit before working cap. changes Working cap, taxes and int Net cash from operations Purchase of PP&E Other investing flows Investing cash flow Financing cash flow Net cash flow Cash at beginning of year Cash at end of year

FY10 1,044.5 235.1 1,332.2 -73.2 0.8 -72.3 -323.4 936.5 1,978.5 2,915.1

FY11 852.6 -526.4 326.2 -437.9 -39.2 -477.1 -774.5 -925.5 2,915.1 1,989.6

FY12F 842.4 -543.5 298.9 -650.0 197.8 -452.2 -269.0 -422.3 1,989.6 1,567.3

FY13F 1,126.9 -800.4 326.5 -600.0 514.5 -85.5 -275.7 -34.7 1,567.3 1,532.6

Key rates & ratios Earnings per share (S cents) NTA per share (S cents) Gross profit margin (%) Net profit margin (%) PER (x) Price/NTA (x) EV/EBITDA (x) Dividend yield (%) ROE (%) Net gearing (%) Sources: Company, OIR forecasts

FY10 41.5 125.2 24.8 19.6 11.7 3.9 9.9 7.4 34.4 Net cash

FY11 36.1 114.2 21.9 19.4 13.5 4.3 12.4 5.1 31.9 Net cash

FY12F 29.9 119.4 18.5 13.4 16.3 4.1 12.1 3.7 25.4 Net cash

FY13F 38.1 139.5 16.0 11.7 12.8 3.5 9.0 3.7 27.7 Net cash

Company financial highlights

OCBC Investment Research Singapore Equities

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Important disclosures