Sembcorp Marine: S$2.05, BUY (TP: S$2.49) - Don't underestimate its value

We valued SCM from another angle and concluded that SCM’s intrinsic value could possibly exceed S$2.90.
S$2.18 from repair and conversion projects - We performed a simple calculation on the net cash flow generated from the repair and conversion projects (assuming debt-free, capex equals depreciation and conservative operating profit margin (OPM) of 22%) and discounted at the rate of 8%. Our simple arithmetic calculation shows that if this counter-cyclical business division is to generate S$2b of revenue per year (to perpetuity), the net present value (NPV) would be S$2.18 (or 88% of our TP).
S$0.72 from rigbuilding division - We ran an analysis of this scenario in a similar fashion, assuming one semi-submersible and one jack-up to be delivered per year. We took both as individual annuity of net cash flow at OPM of 8-10% and discounted rate of 8%, deriving a combined NPV of S$0.72 per share. We believe our assumptions are not unreasonable, given that the management’s mid-term strategy is to deliver 2 semi-submersibles and 2 units of jack-ups/floating production units per year.

We believe the stretched-test for SCM’s worst case scenario would imply business activity constricted to only repair and conversion projects (assuming no new contracts secured – which we believe to be unrealistic) at an intrinsic fundamental value of S$2.18 (and this is still 6% higher than Friday's closing price of S$2.05). However, we believe this is unlikely to be so, as SCM has progressed into an internationally-renowned rig-builder, just second to Keppel Corp.

We chose the conservative S$2.49 as target price, which is based on to sum-of-the-parts valuation:
P/E of 12x FY09 blended earnings for SCM’s rigbuilding, repair and conversion sectors;
Implied value of SCM’s 30% stake in Cosco Shipyard Group (with reference to the implied P/E of 3x FY09 EPS of our valuation in Cosco Corp)
4.98% equity interest of Cosco Corp at Cosco’s TP of S$0.68

The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned

Sembcorp Marine: Strong margins in 3Q08

3Q08 net profit better than expectations. Sembcorp Marine (SCM) announced its 3Q08
results last evening. 3Q08 topline fell 2.3% YoY (and -17.4% QoQ) to S$1.1b as there was no
major initial revenue recognition, other than one unit of jack-up rig during the quarter. Gross
profit margin increased significantly from 9.4% in 3Q07 to 15.5% in 3Q08 (vs. 11.2% in 2Q08).
Excluding S$12.5m net gain in foreign exchange due to the revaluation of US dollar monetary
items, core profit before tax (PBT) achieved S$168.4m, surpassing our estimates by 23% due to
higher margins as well as increased contributions from SCM’s associated company, Cosco
Shipyard Group.
On track for record year. On a 9M period basis, SCM’s turnover increased 8.5% to S$3.4b
from S$3.2b in 9M07. PATMI surged 50.0% to S$360.5m from S$240.2m in the same
corresponding period.
However, outlook remains cautious as tight credit market has put on hold big ticket
purchases. The Offshore Marine sector is capital intensive in nature. With tightening of the
capital markets and easing oil price, we opine that our earlier beliefs of possible contract inflows
such as the Petrobras’ new production platform, P62, a repetition of P-54, (approximately valued
at more than US$1.0b) and other piecemeal Floating Production Units (FPU) contracts may be
shelved and/or not be materialized. This point may be illustrated from Atwood Oceanic’s recent
press announcement on its choice not to exercise the option to build a third semi-submersible at
SCM.

The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned