Last night, SembCorp Marine reported  a big margin surprise in their fourth quarter 2014 results at 16.1% versus 11.1% in the fourth quarter of 2013. Full year margin came in at a healthy 12.1%, versus 11.7% in 2013. Profit of S$174m was 19% ahead of street and in line with MER estimates.
 
MER has an Outperform rating on SembMarine with a 12-month price target of S$4.00. Read on for excerpts from MER’s research report which was published on 12 February 2015. …
 
The Good:
Highest EBIT margins in 3 years: SembMarine’s earnings before interest and tax (EBIT) margin has been hovering around 10-13% for the past 3 years. In the past 5 quarters, SembMarine’s margins have been lower in the 10-11% range. MER has been reiterating that SembMarine’s margins were low in the past 18 months due to high initial cost booking on Drillships and that they would bounce sharply when provisions are reversed.
 
Revenue mix is changing and also helping margins: 27% of fourth quarter 2014 revenue came from conversion jobs (higher margin) while 28% came from jackups. Another 16% came from drillships which MER believes are from the 1st drillship which is close to delivery now and has hardly any cost booking left.
 
Order book mix is less dependent on jackups: SembMarine ended 2014 with robust S$11.4bn order book out of which jackups is only 14%. Given that MER thinks that the global jackup demand will slow over next 12-24 months, SembMarine’s move towards floating production storage and offloading (FPSO) conversions (27% of order book) and drillships (53% of order book), is in the right direction in MER’s view.
 
The bad:
No orders in fourth quarter 2014: Due to the oversupply situation in the rig market and the oil price decline, SembMarine won zero orders in fourth quarter 2014.

Looking forward:
1st drillship delivery is due in second quarter of 2015; execution in focus: The 1st drillship is more than 80% complete and has reached Brazil where the finishing touches are being applied before delivery to Petrobras apparently on schedule.
 
Most orders in 2015 will come from “non-rigs”: MER expects S$3.5bn of new orders for SembMarine in 2015. While MER expects a poor year for rigs, MER thinks SembMarine will win most orders from non-rig segments like fixed platforms and FPSOs.
 
Margins will not continue sliding: MER think SembMarine’s margins bottomed in 2013 and the big move towards higher margin non-rig business will help long-term blended margins to stabilise around 12-13%.

 
Price catalyst

• 12-month price target: S$4.00 based on a RNAV methodology.

• Catalyst: New orders

 
MER’s action and recommendation
Orders and margins are key to stock recovery: While margins, in MER view, are on the road to recovery, order inflows have dried up in last 3 months. New orders in the “non-rig” segment will be key to stock recovery, in MER”s view.

Source: Macquarie Research - 13 Feb 2015