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Friday 22 February 2013

The Sembmarine Effect



By Michelle Teo

Tang Kin Fei, CEO of Sembcorp Industries, takes much pride in how the company’s mega power plants and water treatment facilities worldwide, which have been painstakingly built up over the years, have been contributing steadily and strongly to the group’s profits. Investors have been taking note, it seems, with confidence in the stock rising and gaining nearly 5% since the beginning of the year.

But that was before its rigbuilding subsidiary Sembcorp Marine’s reported poorer-than-expected results on Feb 21. When trading started again on Feb 22, the stock of both companies lost more than 4% in value by midday.
For years, Sembmarine, which transitioned from ship repair to building rigs at the beginning of the 2000s in time for the offshore boom, has brought in the lion’s share of profits for Sembcorp. But that has begun to falter. In FY2011, its share of Sembcorp’s total net profits was 55%, compared to a share of 63% in FY2010.

The market will see what that share is now when Sembcorp reports its full-year results on Feb 26. At 9M2012, Marine’s share of the group’s total earnings has fallen to 40%, compared to 55% in 9M2011. Meanwhile, net profit from the Utilities segment for the nine months is $293.5 million, or 96% of FY2011’s.

CW8888: This is what Tang Kin Fei, CEO of Sembcorp Industries trying to tell the market.

For FY2012, Sembmarine reported a 28% y-o-y decline in earnings to $538 million for FY2012, despite a 12% increase in turnover to $4.4 billion, as operating profits for rigbuilding projects fell. The company says this is primarily due to the lower margins from the new design rigs – the management were being conservative on costs for the drillship and rigs in the initial stages of building. Analysts say this could mean that margins may improve later.

Sembmarine is currently building seven drillships for Brazilian oil exploration company Petrobras, but analysts are also concerned that as a comparatively new entrant in the drillship segment, the company could face cost overruns, labour shortages, construction delays and other issues related to a new yard in Brazil. Nevertheless, it’s a good start for longer-term growth, says Maybank Kim Eng analyst Yeak Chee Keong. “Sembmarine gets a piece of the drillship market, which has been dominated by the Korean [companies].”

Yeak remains positive on Sembmarine, noting that its outlook is good at $13.6 billion in net orders, of which $900 million were secured this year. While he has cut FY13-15 earnings forecasts by 4%-6% on lower margin assumptions, and lowered the target price accordingly to $5.40, Yeak is keeping the ‘buy’ call on the stock. “Sembmarine could succumb to near-term sell-down from weak margins and there will be opportunity to accumulate at lower levels.”

What about its impact on Sembcorp? As the utilities business strengthens and Sembmarine’s share of earnings contributions diminishes, it raises questions about Sembcorp’s 60.6% stake in the rigbuilder. “It’s a legacy issue,” Yeak says.

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