SembMarine – UOBKH

1H07: Net profit up 61% yoy to S$158.8m

SembCorp Marine (SMM) posted a 1H07 net profit of S$158.8m, up 61% yoy (2Q07: S$85.1m, +48% yoy). It has declared a record interim one-tier taxexempt DPS of 5.0 S cents (1H06: 2.8 cents gross dividend). The company has also proposed a 2-for-5 bonus issue to improve trading liquidity and a wider spread of shareholders. 1H07 turnover was S$2,005.3m, up 30% yoy, boosted by higher turnover in shiprepair (+34%), ship conversion & offshore (+35%) and rig building (+48%). However, shipbuilding’s turnover fell by 52% yoy, as it has been SMM’s conscious decision to cut back on shipbuilding contracts in view of the boom in offshore fabrication. 1H07 net profit was 48% of our FY07 net profit forecast of S$333.0m. Excluding a tax-writeback of S$4.4m in 1H07 and an asset impairment charge of S$6.1m in 1H06, net profit increase would have been 48% yoy. 1H07 earnings were substantially boosted by associates’ contributions of S$36.3m (+140% yoy) because of strong performance posted by 30%-owned associate Cosco Shipyard Group (CSG).

2Q07’s gross profit margin of 7.6%, while lower than 1Q07’s 8.4%, was higher than 2Q06’s 6.0%. Profit margins fluctuate quarter-to-quarter depending on turnover mix. Margins also depend on the number of project completions in the quarter as a significant portion of profit is usually recognised on project completion while very little profit is recognised in the initial stages of a project.

S$4.5b worth of new offshore & marine (O&M) contracts have been clinched by SMM in 1H07. This has already surpassed last year’s total new contracts of S$3.1b. As such, outstanding O&M orderbook (excluding shiprepair) rose from S$5.5b as of end-06 to S$8.2b as of end-1H07.

Our FY07 net profit forecast remains unchanged. However we have tweaked our FY08 and FY09 earnings forecasts marginally by 2-3%. We have raised our target price to S$6.50 based on our sum-of-the-parts valuation of S$6.49/share. Besides its 30% stake in CSG, SMM also owns 150.4m Cosco Corp (S) shares (6.7% stake). At yesterday’s closing price of S$4.94/share, this investment is worth S$743m or 50.6 S cents per SMM share. Maintain BUY on SMM.

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