SembMarine reported S$109m in second quarter 2015 (2Q15) profits (down 17% year-on-year), in line with MER estimates. First half 2015 (1H15) net profit makes up 43% of MER’s full year forecast for 2015.

The Good
Higher ‘non-rig’ revenues: The quarter saw ‘ship repair’ revenue rise 11% to S$166m while ‘conversion’ revenue grew 36% to S$402m. SMM has successfully filled the gap of falling ‘rig’ revenues, diversifying its exposure to the segment.

Margins improve with mix: Earnings before interest and tax (EBIT) margin for the quarter came in at 12.2% (versus 11.5% in 2Q14), improving on the back of higher margin ‘conversion’ and ‘ship repair’ operations. 1H15 EBIT margin was 11.4% versus MER’s full year estimate of 12.3%.

S$1.4bn of new orders in 2015 YTD, upside surprise on street estimates: The numbers include a semi-submersible crane vessel order worth approximately S$1.35bn and an FSO order of S$56m. This brings ending order book to a healthy S$10.9bn. Three vessels were successfully delivered in the quarter, including 2 semi-subs and 1 jack-up.

Dividend of S$0.04/sh, in line with full year expectation: With a full year dividend expectation of S$0.12, MER expects S$0.08 to be paid out in 2H15, an amount similarly paid in 2H14.
 
The Bad
Possible rig order delays: As highlighted in MER’s earlier report, MER sees delay risk on rigs being built speculatively and a pushback of deliveries for 55% of SembMarine’s order book.
 
Looking forward
Brazil drillships: SembMarine continues to engage with Sete Brasil and explore its options, citing a possible slowing down of drillship construction. MER remains sanguine on Brazil orders, SembMarine’s good execution places it in good standing with Petrobras, and MER expects payments to re-start in Nov’15 as per SembMarine management
 
Earnings and target price revision

• No change.

 
Price catalyst

• 12-month price target: S$3.40 based on a RNAV methodology.
• Catalyst: New orders.

 
Action and recommendation for SembMarine

Stock close to bottoming out; buy it for the yield: The shares are trading at a 1.6x, 1-year forward price-to-book ratio, close to GFC levels of 1.5x now and at 1 standard deviation below its mean price-to-book ratio for the first time since 2009. As dividend remains on track, MER sees strong yield support of 4-5%. MER thus maintains Outperform on SembMarine with a 12-month target price of S$3.40.

Source: Macquarie Research - 11 Aug 2015