SembCorp Marine’s Q2 net jumps 48%

Company announces 5 cent a share mid-year dividend

SEMBCORP Marine Ltd, the world’s second-largest maker of offshore oil rigs, said second-quarter profit rose 48 per cent, helped by higher operating margins in rig building and ship repairs. Net income increased to $85.1 million, or 5.75 cents a share, from $57.5 million, or 3.91 cents, a year earlier, the company said in a statement to the stock exchange yesterday. Sales were little changed at $1.05 billion in the quarter from $1.04 billion a year earlier.

Oil companies brimming with cash from the highest crude prices ever are expanding the search for new fields to deeper seas, boosting demand for rigs equipped to handle the harshest assignments.

SembCorp Marine and bigger rival Keppel Corp are benefiting because 80 per cent of the world’s production platforms are older than 20 years and need replacing. ‘Oil prices moving to a new high and staying close to a record are good for the stock,’ Ang Soo Kee, an analyst at Daiwa Institute of Research Pte in Singapore, said before the earnings were announced. ‘Rig operators will be more inclined to order more with oil prices staying so high.’

Daiwa has a ‘hold’ rating on SembCorp Marine shares.

Shares of SembCorp Marine have risen 60 per cent this year, outperforming a 15 per cent gain in the benchmark Straits Times Index. The shares fell 10 cents, or 1.8 per cent, to $5.45 yesterday at the close of trading in Singapore. The earnings were announced after the close of markets.

The company announced a mid-year dividend of five cents a share from 2.8 cents in the first half of last year. The board also recommended the issue of two free shares for every five held by shareholders.

Crude oil rose to a record US$78.77 a barrel in New York on Wednesday on concerns about a lack of supplies in the US, the world’s biggest energy user.

SembCorp Marine has secured a record $4.5 billion of orders this year, and its order book stood at $8.3 billion as of June 30 with completion and deliveries until 2010, said the company, which has shipyards in Singapore, China, Brazil and Indonesia.

The company said it continues to benefit from high demand for ship repair and dock space booking.

Rig building fundamentals remain strong with demand trending towards deepwater rigs, SembCorp Marine said in its statement. ‘The sustained higher level of exploration and production spending and the higher oil prices will continue to support the demand for offshore fleet construction.’ – Bloomberg

Strong 2Q, in line with our expectations

2Q07 + 48% yoy, 1H07 +62% yoy. Excluding S$176m revenue from Kristiansand rig in 2Q06, Group revenue rose 22% yoy to S$1051.6m due to stronger performances from shiprepair, conversion and rig building. Despite the lower number of vessels repaired in 2Q07 of 67 vs 78 in 2Q06, the average repair value rose to S$2.74m from S$1.63m as more higher value added jobs are being taken on. Tankers now account for 43% of shiprepair revenue versus 25% last year. Unsurprisingly, shipbuilding revenue declined 58% yoy as shipbuilding activities are scaled down to channel resources to rig building and conversion. EBIT margins improved 2.2pp yoy to 7.7%. QoQ margins can be volatile and this was seen though a small drop of 0.8ppt. Net profit, excluding exceptional S$10.1m gain from sale of Kristiansand rig in 2Q06, rose 81% yoy to S$86m.

Shiprepair remains strong. Dock space is fully utilized with forward jobs of S$200m already confirmed. One jack up has recently been completed with another scheduled for completion next week. YTD order wins now amount to S$4.5bn and we expect it to hit S$5bn for this year. Current order book is S$8.3bn, providing good visibility to earnings. While the momentum for jackup orders could slow, we expect a pick up in orders for semis and floating production systems especially FPSOs. SMM is well placed to leverage on this through its acquisition of SMOE last year

Maintain Buy, TP S$7.90. No change to our estimates and target price at this stage. Our assumptions for margins are conservative – we are looking at EBIT margins of 7.7% in FY07 (1H07A : 7.3%), 8% in FY08 and 8.3% in FY09 – and these could also surprise on the upside in 3Q and 4Q. In addition, we believe that there could be some corporate activity regarding their 35% stake in Maua Jurong, Brazil as Petrobras’ contracts are increasingly requiring a high local content. We believe that the cycle has more room to run and there is good visibility to revenue – excluding shiprepair, 96%, 75% and 45% of revenue in FY07, FY08 and FY09 respectively are already covered by confirmed orders. SMM has declared a dividend of 5cts and a 2 for 5 bonus issue.

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.