Sembcorp Marine

Sembcorp Marine: 3Q14 in line. Net profit rose 1.8% to $132m, weighed by lower margins and muted ship repair revenue. Revenue increased 3.2% to $1.7b. Rig building revenue was 8.1% higher y/y at $1.2b (+41.4% q/q) on the back of higher initial recognition of four rigs and the delivery of two, while offshore and conversion saw a 10.7% y/y increase to $300m (+1.6% q/q). Ship repair revenue of $157m (+4.8% q/q, -23% y/y) remained muted. Weak EBIT margins of 10% (2Q14:11.5%, 3Q13: 10.1%) was attributed to conservative recognition during procurement phase of the third and fourth Sete Brazil Drillships. YTD contracts secured was $4.2b, bringing order book to $12.6b with deliveries till 2019. SMM pacified concerns on Brazil risks by reaffirming on-schedule delivery of its first drillship. It also quashed news that Petrobras may reassign its FPSO topside contracts to another yard, stating that work on these projects are still ongoing. But ultimately, SMM needs to deliver on its margins to address this overhang. Management was surprisingly optimistic on order outlook, referencing strong enquiries regarding production assets, with the enlarged Tuas yard capacity to capture such orders. Nevertheless, on a weak macro outlook, new rig orders would edge more towards the downside. BVPS of $1.332 translates to 2.8x P/B. Latest broker ratings: Maybank-KE maintains Hold with TP of $3.80 Deutsche maintains Sell with TP of $3.20 StanChart maintains In Line with TP of $3.65