Yesterday, SembCorp Marine closed at its lowest since 6 September after tumbling 3.1% to $4.36. Investors sold the stock despite the company posting its highest quarterly revenues ever in its recent third quarter results announcement on Tuesday.

SMM reported S$130mn, +13% year-on-year (YoY) profit in its 3Q13 results. Higher than expected revenue growth and lower than expected margins were the highlights of the quarter – both due to one reason – 5 new projects starting revenue recognition in 3Q13. Its new yard in Singapore was inaugurated yesterday.

On SembMarine’s results, Macquarie Equities Research (MER) issued a research note on 5 November with the following analysis:

The Good:
86% YoY jump in revenues; highest quarterly revenues ever: The revenue growth story has kicked in from this quarter. The big jump in order book over the last 18 months plus the new shipyard have started contributing.
 
Ship repair revenues move to more than S$200m/quarter versus approximately S$150m/quarter: The new shipyard started in August and the impact is visible. SembMarine’s claims that ship repair revenues can double in 2014 might not be unfounded in MER’s view.
 
9-months 2013 Earnings Before Interest and Tax (EBIT) margin at 11.9% is in line with street expectations: 9-month margin is in line with expectations despite including bad debt provision on a lot of newly started projects plus higher initial costs on the Brazil Drillships.
 
The Bad:
Quarterly EBIT margin low at 10.1%: SembMarine started 5 new projects – 2 Semi-subs and 3 Jack-ups in the quarter. High cost provisions initially on new projects led to lower margins, in MER’s view.
 
Quarterly profit miss of 7% versus MER’s estimate: Fourth quarter results are generally the strongest due to tax write backs. MER thus sees no need to change their full year estimate.
 
Looking forward:
Robust order book of S$13.5bn provides impetus for continued high revenues: This year’s revenues are set to jump around 19% and MER expects 2014 revenues to jump by another 30%. With margins expected to improve in 2014, it sets the stage for a bumper profit growth in 2014 in MER’s view.
 
Margins will bottom out in 2013: MER believes margins at 12.0% will bottom out in 2013 as engineering costs on Brazil Drillships are phased out in 2013 while higher margin impact from new ship repair revenues kicks in.
 
Action and recommendation
New shipyard and robust order book set to provide the boost: The street might have to increase its estimate on ship repair revenues as the new shipyard impact is visible.
 
MER has an Outperform rating on SembMarine with a 12-month target price of $5.80.

Source: Macquarie Research - 7 Nov 2013