3 biggest reasons why Sembcorp is unfazed by Brazil operational woes

It's not taking the same route as Vard.

According to Maybank Kim Eng, Sembcorp Marine's 2Q13 operating margins would be stable at 12-13% (1Q13: 13.7%, FY13F:12.9%). 

Maybank noted that concerns on Brazil yard operations may once again be raised given Norwegian shipbuilder Vard’s recent issues in Brazil. While the management was cautious of the risks, they maintain that their established track records and experience would help see them through these challenges.

The mitigating factors cited were: (1) local content proportion is not 100% unlike Vard (55-65% for SMM), (2) SMM will not likely need to outsource to third-party Brazilian yards as what Vard did, (3) Its new yard is in a less crowded area (Espirito Santo) where there are ready access to labour as opposed to Rio de Janeiro.

Here's more:

The first Sete Brazil drillship achieved initial recognition (20%) in 4Q12 (4Q12 op. margin: 10.8%) and would now be progressively recognised. Given the S-curve recognition profile, revenue recognition would be slower in the earlystage and accelerate during the mid-stage.

The second drillship is likely to achieve initial recognition only in 4Q13 or 1Q14. Therefore, we believe that there should not be any major margin drag from conservative margin recognition of Brazilian orders in the next two quarters.

We estimate 2Q13 PATMI of SGD162m (+37% YoY, +14% QoQ) on the back of SGD1.4b (+34% YoY, +16% QoQ) in revenue.