SembMarine

SembMarine posted healthy 2Q10 net earnings +28% to $176m despite a 27% decline in revenue to $1.09bn. The fall in sales was attributed to the lower value of of revenue recognition for rig projects. Gross margin expanded to 21.6% from 14.1% in 1Q due to stronger operating efficiencies from rig building/conversion. This more than offset weakness from ship repair; lower dollar value achieved per vessel repair due to a softer macro outlook.

Margins are likely to be maintained in 2H as the group will book gains from the recent sale of CJ-70 rig to SeaDrill. Mgmt is confident of achieving its $2-3bn of new orders this year, of which some $853m has been secured so far. This excludes the potential rig orders from Petrobras. Current orderbook stands at S$4.3bn, down from $5bn in 1Q. The group has tendered for 7 drillships and 2 semisubmersibles as part of Petrobras' massive 28-rig tender ans is upbeat on the orders materialising.

While the Gulf of Mexico drilling ban has caused near-term uncertainties, overall prospects are sound. Medium term, tighter safety measures will result in more upgrade work. Longer term, the ageing global deepwater fleet will lead to more replacement demand.

Going forward, the stock will be underpinned by good earnings visibility this year and prospects of Petrobras orders although the thinning orderbook is a concern. Stock is trading at mid-cycle 13x FY10 P/E. KE has a TP of $4.95 on the stock, DB has $5.20 and Citigroup $4.60.