Sequential improvement in margins but still lower than expected. Sembcorp Marine  (SMM)'s 2Q12 net profit of S$143m (+26%  QoQ,  -5%  YoY)  was  below our estimate of S$170m and consensus estimate of S$182m. The reason for the underperformance  was  the  lower  operating  margin, which  came  in  at 13.1%,  up from  12.8%  in  1Q12,  but  below  our  forecast  of  15.5%.  SMM  kept  its  operating margin  target  of  14-15%  for  FY12  as  they  expect  margins  to  improve  once  the higher priced jackup orders as executed. The company also declared an interim dividend of 5S''. Following the results, we lower FY12-13F EPS by 5% and 10% respectively  on  lower  margin  assumptions.  Maintain  BUY  with  a  lower  SOTP-derived TP of S$5.70 (from S$5.80).

Revenue  in-line  but  operating  margins  below.  2Q12  revenue  of  S$1.2b  lifted 1H12 revenue to S$2.16b, in-line with our expectation. 1H12 net profit of S$258m (-15%  YoY)  accounted  for  41%/39%  of  DMG/consensus  estimates.  1H12 operating margin was 13.0%, lower than SMM's full-year target of 14-15%. 2Q12 results included an impairment loss of S$2m on a long-term equity investment.

Key highlights from 1H12 briefing:  (1)  SMM is still in  discussion  with Sete for the  newbuild  drillships.  Management  is  confident to  secure  the  orders  this  year; (2)  SMM  kept  its  operating  margin  target  of  14-15%.  Margins  could  improve  on more  variation  order  and  execution  of  higher  priced  jackup  orders.  Note  that jackup  ASP  has  increased  10-15%  from  its  lowest  price  point  in  4Q10.  (3)  The jackup options granted to Seadrill have lapsed. The balance newbuild options are two  jackup  for  Noble,  one  jackup  for  Perisai  and  two  semisubs  for  Prosafe.  (4) YTD  order  win  of  S$3.1b  is  ahead  of  Keppel's  S$2b.  Net  order  book  remains healthy at S$6.6b (as of 8 Aug 2012).

Valuation: TP cut marginally from S$5.80 to S$5.70. We value SMM based on sum-of-the-parts (SOTP): (1) the shipyard at 18x FY12/13 net operating income; (2)  adjust  for  S$1.17b  net  cash;  (3)  Cosco  Shipyard  Group  at  8x  P/E;  and  (4) stake in Cosco Corp at market value.

Source: OSK