• 2Q15 results below
• May see more rig deferments
• Cuts interim dividend to S$0.04

2Q15 results below expectations

Sembcorp Marine (SMM) reported a 9.9% YoY drop in revenue to S$1.21b and a 17.0% fall in net profit to S$109.2m in 2Q15, such that 1H15 net profit formed 42% and 39% of ours and the street’s full year estimates, respectively. Results were below expectations as certain units saw some deferment in delivery schedules. Operating margin was 12.2% in the quarter, compared to 11.5% in 2Q14 and 10.6% in 1Q15.

To see more newbuild deferments?

According to Upstream, Mexican drilling contractor Oro Negro is understood to be in negotiations with SMM to delay delivery of a jack-up rig. Recall that Oro Negro placed orders for six units since Dec 2012; three units have already been delivered, and the fourth has seen a delay in delivery from Jan 2015. The last two jack-ups are slated for delivery in 3Q15 and 4Q15, but given that Oro Negro is dependent on the Mexican market and PEMEX is expected to cut its rig fleet by half to 40 units, chances of deferments seem to be increasing.

Updates on Sete Brasil

According to management, more than 80% of the first Sete Brasil drillship has been completed, followed by 74% for the second, 60% for the third and 30% for the fourth. These projects remain cash positive.

Time needed to ride out this downturn

Time will be needed to ride out this downturn, and SMM is in a relatively good position with its S$10.9b net order book, but about half of this relates to the Sete Brasil orders. Excluding ship repair contracts, SMM has received S$1.35b of orders to date vs our FY15F estimate of S$1.5b. Meanwhile, the group has cut its interim dividend from S$0.05/share last year to S$0.04/share this year to conserve cash. Maintain HOLD with a lower fair value estimate of S$2.62 (prev. S$2.77).

Source: OCBC Research - 30 Jul 2015