SembCorp Marine: Not a one-way street yet

Margins held up well in 1Q09. SembCorp Marine’s (SMM) EBIT margin rose 2.2ppt y-o-y to 9.9% in 1Q09, resulting in S$134.6m EBIT (+69% y-o-y). SMM’s net profit in 1Q09 was US$120.2m (+32% y-o-y), in line with our expectation. The lower net profit growth was due to smaller contribution from associates, as Cosco Shipyard Group’s (CSG) net profit dipped 58% y-o-y to S$13.3m. Our FY09 net profit is cut by 2% to S$468m, due to lowered projection for CSG’s earnings.

Sale of Petrorig 1 is going on smoothly. SMM guides that there were active enquiries on its sale of Petrorig 1, despite the requirement for each bidder to put US$15m deposit before proceeding further with the bids. The potential selling price for the rig is US$450m, and we believe that the results may be known by late May.

Downgrade to HOLD. SMM’s share price has also done well (+28%) since we commenced our 3-week Asia roadshow on 22 April, outperforming Keppel Corp [FULLY VALUED, S$4.41] by 10ppt. We now believe that even SMM’s share price is no longer cheap, despite: 1) Our contrarian view that order cancellation risks are dissipating, and 2) Our earnings model having factored in one of the highest new order win (S$3b) in the streets. We downgrade SMM to HOLD. Our new fair value is S$2.61, factoring in higher share price target for Cosco Corp [FULLY VALUED, S$0.85] in our SOTP valuation metric for SMM. The key catalyst for future upgrade remains the lifting of credit crunch, which would release the lid on the new orders for floaters.

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