Last Thursday, Sembcorp Marine (SMM) reported S$125m profit in 2Q13, due to delay in revenue recognition of few projects to 3Q13. On the same day, Macquarie Equities Research (MER) released a research report with an ‘Outperform’ rating on SMM and a 12-month target of $5.80. Some excerpts from the research report are shown below.

Event
Although profit came in -13% YOY and 20% below estimates, MER thinks that it is more important to note that SMM ended 2Q13 with its highest ever order book of S$14.4bn stretching until 2015, and reported 13.0% EBIT margin in 2Q13 and 13.3% in 1H13, far exceeding street’s estimate of 12.5% and MER’s of 13.0%.

MER is sticking to its full year profit forecast of 12% YoY growth which would mean that 2H13 profits will be substantially higher than 1H13 profits (+48% YoY), a result of recognising revenues from some big projects in 2H13.

Impact
Robust margin in 2Q and 1Q is the highlight; Revenue miss will be made up in 2H13:1H13 saw revenue growth of 1% and profit decline of 5% YoY (S$244m). The biggest positive was EBIT margin of 13.3%, far ahead of street estimate of 12.5% for full year 2013 and MER’s estimate of 13.0%.

S$14.4bn of order book at end 1H13; Highest ever:Driven by robust order inflows over last 18 months (orders of S$3.5bn in 1H13 are 70% of MER’s full year estimate), SMM’s yards are now full until 2H15, providing strong ammunition for robust revenue and profit growth until 2015, in MER’s view.

Gear up for a bumper 2H13:Due to many project completions and new projects starting in 2H13, MER expects a significant 23% YoY jump in revenues and 48% jump in profits for SMM in 2H13.

2014 is the big year for profits:All the big project wins over the last12-18 months are going to translate into revenues and profits in 2014 in MER’s view. MER expects a 43% jump in revenues and further 25% jump in profits in 2014.

New shipyard in Tuas starting in August ’13:The yard spanning 73.3 hectares will start its first job soon. In 1H13, SMM has done ship repair revenues of S$314m, which should now get a strong boost from 2H13.

MER’s Action and recommendation
“Industrial cyclical” seems to be back in flavour; SMM inching up:Out of favour at the start of 2013, SMM has gone up 8% in the last 5 weeks. Investors seeking exposure to the industrial cyclical stocks are finding comfort in a high quality, liquid name like SMM with strong visibility, in MER’s view.

At 12.6x ‘14E P/E, it makes sense to start accumulating for the long run:Orders and margins are what matter for yard stocks, and on both those counts, SMM seems to be on a strong footing for next 2-3 years.

Source: Macquarie Research - 6 Aug 2013