• Change in accounting recognition
• 4Q14 to be stronger
• Drillships all on track

Lower margins in 3Q14 with more procurement revenue

Sembcorp Marine (SMM) reported a 3.2% YoY rise in revenue to S$1.7b and a 1.8% increase in net profit to S$132m in 3Q14, such that 9M14 revenue and net profit accounted for 75% and 68% of our full year estimates, respectively. Though operating margin of 10% in 3Q14 was similar to that in 3Q13, it was lower than the 11.5% seen in 2Q14, and this was mainly because procurement revenue from two additional drillships (which started revenue recognition in 3Q14) was recognized in the quarter, dragging down overall margins. We expect 4Q14 to be a stronger quarter due to the completion of several projects, including three jack-up rigs, the semi-sub accommodation rig for Prosafe, and the onshore module for an LNG facility.

Updates on drillships – all on track

Four drillship units contributed to revenue in 3Q14, with the 1st unit (Jun 2015 delivery) being more than 75% recognized, more than 50% for the 2nd(Aug 2016 delivery), more than 20% for the 3rd (Dec 2016 delivery), and about 14% for the 4th (Aug 2017 delivery). The official delivery date for the 1st drillship is 30 Jun 2015, along with a month’s grace period.

Brazil yard- commenced initial operations

According to management, construction at the Brazil yard is progressing well. There are slightly more than 900 people at the yard currently, and these are all under SMM’s direct headcount (none from subcontractors). SMM envisions that this number will rise to about 2500-3000 people at steady state. As SMM enters the critical phase of completing its first drillship in the new Brazil yard, we believe this is likely to the focus in 4Q14 as well.

Still getting “healthy enquiries”

Currently, SMM has a net order book of S$12.6b with deliveries till 2019, and management remains optimistic in terms of new order outlook, especially from production-related work such as FPSOs and fixed platforms. In particular, the group looks forward to executing more FPSO-related work with its enhanced yard capacity in Tuas. Maintain BUY with S$4.18 fair value estimate.

Source: OCBC Research - 6 Nov 2014