Sembcorp Marine's margins shrinking? Don't panic, it's normal

The company's outstanding orderbook stood at SG$5.1b and it continues to rake in new contracts.

The forecast is SG$11.5b in contract wins, turning 2012 into a possibly record-breaking year for SMM.

Lower margins represent a normalisation in terms of the orderbook being depleted of high-margin contracts secured before the global financial crisis. Strong order wins should lift earnings in the subsequent years.

Here's more from Maybank Kim Eng Singapore:

Sembcorp Marine is due to announce its 1Q12 results on 9 May 2012. Flat YoY growth is expected in quarterly core net profit to SG$155m. Lower margins should not be a cause for concern as they merely reflect a normalisation in terms of the orderbook being depleted of high-margin contracts secured prior to the global financial crisis. While EPS is predicted to slide by 7.7% YoY in FY12F, strong order wins should lift earnings in the subsequent years.

Drillship orders soon to follow

After Sete Brasil signed an LOI with Keppel Corp last month for five semisubmersible orders, SMM would be next in line to be awarded its share of Petrobras-related contract of five drillships, estimated at US$4b in value. SMM had already won one drillship contract worth US$792.5m in February. There is growing confidence that the contracts would soon be awarded to SMM and this has been incorporated this into forecasts.

A record year of contract wins

SMM’s outstanding orderbook stood at SG$5.1b as at end-FY11. To-date, it has secured SG$2.7b in new contracts. The forecast is SG$11.5b in contract wins, including the Petrobras-related orders. If this eventuates, 2012 would mark a record year of contract wins for SMM.

Capacity increase to come at the right time

Phase 1 of SMM’s Integrated New Yard facility is expected to be operational by end-2013 with an additional 73.3ha in land area. However, two of the four dry docks would be completed by 4Q12. This increase in capacity would come at a time when the sector is in its upturn and might give SMM an edge in terms of yard capacity availability.

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