Sembcorp Marine - On-time deliveries puts stamp on track record

Sembcorp Marine has delivered a total of four jack-up rigs to its customers from December last year to June this year, all on-time or ahead of time, putting a stamp on its execution track record. This follows the seven jack-up rigs delivered last year (excluding December). On the semi-submersible front, following the delivery of the PetroRig1 to new owner Diamond Offshore, the group remains on track to deliveranother semi-submersible this year, with another three units per year in 2010 and in 2011.

On July 1st, the group announced that SeaDragon Offshore had awarded SMM’s Jurong Shipyard its second rig order, to complete (from a Russian-built new bare-deck hull) and deliver a Moss Maritime dynamically positioned (DP-3) semi-submersible drilling unit for US$237.3mn. This comes just three months after the group won its first US$247mn SeaDragon Offshore rig finishing contract. The second SeaDragon contract brings the group’s new orders to-date to S$964mn. However, management remains confident that more offshore rig and conversion contracts are in the pipeline, not just from re-directed rigs but also from national oil companies that are keen to exploit offshore territorial waters, based on the level of enquiries the group has seen. Petrobras in particular has been making active enquiries at the shipyards (in Singapore and in Korea) for new semi-submersibles and drillships for the Brazilian national oil company’s large deepwater finds in the Tupi and Jupiter fields. According to the group, Petrobras is still seeking to charter and tender for 28 new offshore rigs, whether semi-submersibles or drillships.

Our price target is S$3.22 based on our sum-of-the-parts (SOTP) valuation comprising a DCF valuation (over a 20-year period and incorporating a cyclical downturn in earnings from FY11) of the group’s shipyard businesses, which includes the three Singapore yards, as well as earnings from overseas yards including Cosco Shipyard Group, and its remaining 5% stake in Cosco Corp. Our WACC assumptions remain unchanged at 7.5%, with a zero terminal growth.

With FY09F and FY10F P/Es of 11.3x and 11.0x, SMM still trades at the lower end of its historical P/E band of between 7x and 28x. FY09-10F ROEs of above 31.6% and 26.8% are creditable for a shipyard group, in our view, and we expect dividends to be maintained for FY09F and FY10F, giving dividend yields of 4.4%, which are attractive relative to peers. SMM holds net cash of S$1.8bn as at March 2009, of which S$1.2bn are WIP payments, with steady cashflow seen from progressive recognition from its S$9bn order-book. Given that capex requirements can be met from its operating cashflow, we believe the group is unlikely to need to raise capital in the short to medium term.

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