Warrants Highlight

SembMarine - Disappointing results but still a buy, MER

Last night, SembMarine reported a 2Q12 net profit of $142.8mn, a 4.6% drop from the previous year and below the $165mn estimated by analysts. The weaker than expected margins in 2Q12 were driven by delayed revenue booking.

In an article released this morning, Macquarie Equity Research (MER) noted that SembMarine does not book revenues on rigs until 20% of the job is completed, which is why no revenues have yet been recognized on nine out of the 19 rigs on the order book. In fact, eight of these orders have been pushed into 2013.

The MER report went on not only to dissect SembMarine’s released figures, but also address potential investor questions:

Earnings before interest and tax (EBIT) margin of 13.1% in 2Q12: The EBIT margin for the first half of this year has now come in at 13.0%, as no revenues have been recognized on 9 out of the 19 rigs on the order book which are higher margin.

Will margins recover in 2H12 and why?
MER believes margins will recover to 15.1% in 2H12, thus taking full year 2012 margins to 14.1%. They will recover because of higher % of high-margin FPSO orders in the second half of this year.

What is the long term sustainable EBIT margin, including Brazil order?
MER thinks approximately 14% of Brazil orders will form 10-15% of revenues starting 2013, while repair revenues will increase and boost margins.

When will Brazil orders be signed and how much will SMM do in 2012?
MER thinks the five drillship orders will be signed in August and the two FPSO orders in September-October. MER reckons SembMarine will win $7.8bn of orders in 2H12, thus taking the full year number to $11bn.

What is consensus getting wrong?
MER believes it is the revenue booking of rigs. MER feels that 2013 will be a massive year for SembMarine’s revenues with growth of 40% YoY thus driving 33% earnings growth.

Why buy the stock?
MER believes there are four reasons.
1) Positioned for growth: With new yards in Brazil and Singapore, SembMarine has positioned itself for long-term growth.

2) Strong balance sheet: $1.4bn of net cash on the balance sheet puts SembMarine in a strong position to counter order cancellations, if any

3) High returns: The return on equity on the stock of ~25% currently is sustainable, which makes the case for high price-to-book multiples valid.

4) Pro dividend payouts: SembMarine has paid special dividends in last two years and should continue with its policy in 2012, in MER’s view.

Hence, MER retains its Outperform rating on SembMarine with a 12 month price target of $6.08.

Singapore Market Wrap

Fed stimulus not quite there yet

With discontent over the Fed's decision of not introducing additional monetary easing, most Asian indices closed lower for the day. Both the HSI and the STI made lower lows steadily throughout the day averting a frantic selloff as investors remained hopeful over the European Central Bank's (ECB) decision, announced last evening. Investors were anticipating further concrete actions from the ECB in a follow-up to Mario Draghi's pledge to keep the Euro intact.

The HSI closed at 19630, down 0.8% day-on-day (dod) while the STI closed at 3035.80, down 0.5% dod.

Call STI 2950MBeCW120831 (QE8W) exercise level 2,950.*
Put STI 2850MBePW120831 (QE9W) exercise level 2,850.*

HSI20200MBeCW120830 (QS5W) exercise level 20,200.*
HSI19800MBePW120830 (QS7W) exercise level 19,800.*

Ezion wins major contract worth US$71mil
Ezion announced a trading halt before the STI started its trading session. Half an hour after the Singapore market opened, the company announced that they had been awarded a third contract to provide full logistics and support service activities for the development of LNG train facilities in Australia, Queensland.

The contract is valued at approximately US$71mil and relates to the development of the first two LNG trains. Works are expected to commence in 1H2013.

Investors celebrated the contract win when trading resumed and Ezion closed at $0.970, up 2.7% dod.

Call warrant EzionHldMBeCW121002 (P9CW) exercise price $1.10.*

OCBC maintains record-breaking results for 1H12
OCBC reported a net profit of S$1480mil for 1H12, an increase of 23% from the same period a year ago. OCBC mentioned that the results were "driven by robust net interest income growth, higher fee, trading and investment income, and healthy insurance revenue from Great Eastern Holdings".

The company's CEO, Samuel Tsien was pleased with the results saying that it reflected the strength of their customer business. With the uncertainty in the global economy, the bank will "continue to grow their customer franchise across all key markets with their strong capital and liquidity base".

Decent earnings did little for the counter and though OCBC gapped up at opening, it trended lower intraday, finally closing at $9.44, down 1.5% dod.

Call warrant OCBC Bk MBeCW121101 (QY0W) exercise price $9.20.*
Call warrant OCBC Bk MBeCW121203 (Q1QW) exercise price $10.00*
Put warrant OCBC Bk MBePW121018 (Q3MW) exercise price $9.00.*

Overnight Market Wrap

Draghi did not live up to the hype he created

Following the Fed's decision to put off further quantitative easing, the European Central Bank (ECB) also failed to meet investors' expectations. Last evening, the ECB announced that they were going to hold interest rates at 0.75%. However, Draghi signalled that the bank will work with governments to purchase more sovereign bonds to the extent that it will dispel any doubts investors have about a euro breakup. He added that the details are not panned out but will be worked out in the coming few weeks.

Investors felt that Draghi failed to come up with any concrete plans and the Euro Stoxx 50 fell by 3% dod.

In the US, jobless claims increased by 8k compared to last week, but it was below analysts' estimates. Still, the better-than-expected jobless claims hardly helped the US markets and US indices fell, closing lower for the day with investors' focus on the ECB. The S&P closed at 1365, down 0.7% dod.

Overnight Markets

Indices	Last	Change
STI	3036.19	-0.5%
HSI	19690.20	-0.7%
DJIA	12878.88	-0.7%
S&P 500	1365.00	-0.7%
Nasdaq	2909.77	-0.4%
China A50	7491.34	-0.7%

Corporate News

Corporate Announcements

Introduction:
SembMarine 2Q12 net profit fell 4.7% year-on-year to $143mn.
DBS 2Q12 net profit increased 10% from the previous year to $810mn.

Results announcements:
Fri 3 Aug: DBS 2Q12
Tue 7 Aug: UOB 2Q12, Ezion 2Q12
Mon 13 Aug: Noble 2Q12
Tue 14 Aug: IndoFood Agri 2Q12, Wilmar 2Q12, Singtel 1Q13, STX OSV 2Q12
Tue 28 Aug: Olam 4Q12

Ex-dividend dates:
Mon 6 Aug: SingTel ($0.09)
Wed 8 Aug: OCBC ($0.16)
Wed 15 Aug: DBS ($0.28), SembMarine ($0.05)
Thu 30 Aug: Sakari ($0.02)
Wed 26 Sep: SGX ($0.15)