SembMarine is down 6.3% versus the STI’s -3.1% in 2014 year-to-date (YTD) as the deepwater nervousness contagion has spread to the shipyards stocks in Asia. While the fundamentals remain robust, the stock has been lacklustre for around 15 months now, and Macquarie Equities Research (MER) believes now is the right time to start accumulating the stock on a 2 to 3 years perspective. In a research report published on 7 February 2014, MER reiterated their Outperform rating on the stock, albeit on a slightly lower target price of S$5.30 and the following are excerpts from the report.

A S$13bn order book, 13% potential profit growth over the next 3 years, net cash balance sheet, approximately 24% Return-on-Equity (ROE), approximately 5% dividend yields, new and exciting drillship venture, and the new high margin shipyard are reasons enough to buy the stock in MER’s view. All SembMarine needs to do is deliver on order inflows in 2014E, in MER’s view.

‌Reasons to buy the stock now
Robust order book, earnings visibility and 22% profit growth in 2014E: SembMarine ended 2013 with a peak order book of approximately S$13bn which is high quality in terms of buyers and pricing. This provides strong earnings growth (13% CAGR over 2012-15E). In addition, MER expects SembMarine to win S$4.5bn of new orders in 2014 while the street has downgraded estimates to S$3 to 3.5bn.
 
Drillship order ex-Petrobras will be a catalyst in 2014E: SembMarine has a lead over Keppel Corp when it comes to drillships in MER’s view as the company has 7 orders from Petrobras in the bag and is only 1 year away from delivering the 1^stone. Its design could be more acceptable to oil majors in MER’s view and they expect SembMarine to win at least 1 drillship order in 2014.
 
Upside from new shipyard in Tuas not fully captured: While management has spoken about doubling ship repair revenues to S$1.3bn from 2014, MER and the street have included conservative estimates of approximately S$1bn.

Key risk
Brazil starting to contribute; Margins could be impacted:The 2^nddrillship in Brazil will start work this year while the first one is approaching completion (due in second quarter 2015). Thus, share of Brazil revenues will go up to 20% in 2014. However, given the mitigating impact from the new shipyard, MER thinks SembMarine will still be able to grow earnings before interest and tax (EBIT) margin from 11.8% in 2013 to 12.5% in 2014.

‌MER’s action and recommendation
Valuations seem disconnected from reality now: SembMarine’s correlation to oil price has gone down to only 45% in the last 1 year versus 83% average in the last 5 years. Also, the stock is on Enterprise Value / Order book multiple of 0.55x versus 0.80x mean multiple in the last 5 years. On Price-Earnings (P/E) ratio, stock is at 11.6x 2015E P/E versus 14 times mean.

MER has an Outperform rating on SembMarine and a 12-month target price of $5.30.

Source: Macquarie Research - 18 Feb 2014