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Singapore Company Focus

Sembcorp Marine
Bloomberg: SMM SP | Reuters: SCMN.SI

DBS Group Research . Equity 4 Aug 2010

BUY S$4.04 STI : 3,014.77 Petrobras holds the key
Price Target : 12-month S$ 5.10 (Prev S$ 5.40) • 2Q10 net profit rose 28% to S$176m, buoyed by
Reason for Report : 2Q10 Results margin expansion despite drop in sales.
Potential Catalyst: Contract wins
• Low YTD order wins of S$853m led to decline in
Analyst order book to S$4.3bn.
Janice CHUA +65 6398 7954
janicechua@dbsvickers.com • Lowered guidance for order wins of S$2b-$3b,
Jeremy THIA +65 6398 7974 tendered for 7 drillships and 2 semi-subs from
jeremythia@dbsvickers.com Petrobras worth about US$6.5bn.
• Lower FY11F by 17% due to deferring earnings
Price Relative recognition from lower-margin Petrobras orders.
S$ Relative Index Maintain BUY, TP reduced to $5.10,still with 26%
6.10
207 upside.
5.10 187

4.10
167
Growth from margin expansion. Despite lower than
147
3.10 127 expected sales, net earnings were in line, boosted by
2.10
107
87
strong EBIT margins which expanded by 7.3ppt y-o-y to
1.10 67 18.4% in 2Q10. Margin expansion was achieved on
efficiency gains and projects secured at high prices.
2006 2007 2008 2009 2010

Associates’ contributions rose 18% to S$14.3m, on higher
Sembcorp Marine (LHS) Relative STI INDEX (RHS)

contributions from Cosco Shipyard Group.
Forecasts and Valuation
Order book running low at S$4.3bn or 1x sales –
FY Dec (S$ m) 2009A 2010F 2011F 2012F
hence Petrobras orders are vital for sustainability of
Turnover 5,725 4,723 4,187 4,549
EBITDA 963 909 822 839 earnings in the medium term. We assume lower non-
Pre-tax Profit 908 857 754 766 Petrobras orders of S$2bn for FY10, and Petrobras
Net Profit 700 678 601 611 orders worth US$5bn for 7 drillships to be secured in
Net Pft (Pre Ex.) 712 678 601 611
EPS (S cts) 33.8 32.7 29.0 29.5
FY10 – potentially a record year in order wins for SMM.
EPS Pre Ex. (S cts) 34.4 32.7 29.0 29.5
EPS Gth Pre Ex (%) 50 (5) (11) 2 Petrobras revenue deferred on long project lead-
Diluted EPS (S cts) 33.7 32.6 28.9 29.4 time, earnings cut for FY11. Contribution from
Net DPS (S cts) 14.9 16.4 14.5 14.7
BV Per Share (S cts) 91.0 108.8 121.4 136.2 Petrobras will be marginal in FY11, as projects
PE (X) 12.0 12.3 13.9 13.7 recognition and completions are staggered over 8 years
PE Pre Ex. (X) 11.8 12.3 13.9 13.7 till 2018, leading to 17% cut in earnings forecast for
P/Cash Flow (X) 11.2 12.0 13.7 13.7
EV/EBITDA (X) 6.7 7.4 8.5 8.1
FY11. SMM’s target is shaved to $5.10 pegged to PE on
Net Div Yield (%) 3.7 4.1 3.6 3.6 blended FY10/11 earnings. Maintain BUY in anticipation
P/Book Value (X) 4.4 3.7 3.3 3.0 of contract wins in coming quarter.
Net Debt/Equity (X) CASH CASH CASH CASH
ROAE (%) 43.7 32.8 25.2 22.9
At A Glance
Earnings Rev (%): (1.2) (17.0) -
Consensus EPS (S cts): 30.3 26.1 24.4 Issued Capital (m shrs) 2,075
Mkt. Cap (S$m/US$m) 8,384 / 6,217
ICB Industry : Industrials Major Shareholders
ICB Sector: Industrial Engineering Sembcorp Industries Ltd (%) 61.0
Principal Business: Principal activities are ship repair, shipbuilding, Free Float (%) 39.0
ship conversion rig building and offshore engineering. Avg. Daily Vol.(‘000) 6,178

Source of all data: Company, DBS Vickers, Bloomberg

www.dbsvickers.com
Refer to important disclosures at the end of this report
ed: MY / sa: YM
Company Focus
Sembcorp Marine

2Q10 results review. expansion was achieved on 1) completion of three
SMM’s 2Q10 revenue of S$1.1bn (-27% y-o-y) was below conversion/offshore projects and one semi-submersible rig,
expectations due to slower recognition of order book sales 2) efficiency gains and 3) projects secured at high prices.
from rig building and conversion projects and lower ship Associates’ contributions rose 18% to S$14.3m, on higher
repair revenue (-10% y-o-y). contribution from its 30%-owned Cosco Shipyard Group.

Despite the lower than expected revenue, 2Q10 net profit of Balance sheet remained strong, with net cash of S$2.4bn.
S$176.1m was in line, boosted by strong EBIT margins which The group declared an unchanged interim dividend of 5.0
expanded by 7.3ppt y-o-y to 18.4% in 2Q10. Margin Scts per share.

Sembcorp Marine’s 2Q10 Results Summary and Comments
% chg % chg
FY Dec (S$ m) 2Q09 1Q10 2Q10 q-o-q y-o-y Comments

Sales 1,497.6 1,359.4 1,097.9 -19% -27% Lower y-o-y due to slower revenue recognition for
rigbuilding projects during the quarter and lower ship
repair revenue
COGS (1,304.7) (1,167.9) (860.9) -26% -34%
Gross Profit 193.0 191.4 237.1 24% 23% .

Other Operating Inc (9.9) 3.7 8.3 121% NM
Admin exp (23.5) (24.8) (34.7) 40% 47%
Other Operating Exp 7.2 (10.8) (8.3) -23% NM
Operating Profit 166.7 159.6 202.3 27% 21%
Non-Operating Inc 0.4 0.0 3.3 NM NM
Net interest inc/(exp) 7.3 12.9 4.9 -62% -33%
Assocs'/JV Inc 12.0 12.4 14.3 15% 19% Higher contribution from SMM's 30% owned Cosco
Shipyard Group due to better margins on shipbuilding
and exceptional gains on a rigbuilding project
Exceptionals (7.5) 0.0 0.0 NM NM
Pretax Profit 178.9 184.9 224.8 22% 26%
Tax (33.1) (33.2) (41.4) 25% 25%
Minority Interests (7.7) (2.9) (7.3) 154% -5%
Net Profit 138.1 148.8 176.1 18% 28%

Margins
Gross margins 12.9% 14.1% 21.6%
EBIT margins 11.1% 11.7% 18.4% Margins were higher on the back of improved
productivity in the execution of rig building, offshore
and conversion projects, as well as completion of
projects ahead of schedule
Net margins 9.2% 10.9% 16.0%

Segmental revenue
% chg % chg
FY Dec (S$ m) 2Q09 1Q10 2Q10 q-o-q y-o-y
Rigbuilding 1,030.2 886.5 737.4 -17% -28% Decline due to timing of initial revenue recognition
Offshore & conversion 280.4 319.8 197.9 -38% -29% Decline due to timing of initial revenue recognition
Repair 173.0 143.7 155.4 8% -10% Lower average value per vessel repaired
Others 14.0 9.4 7.2 -23% -48%
1,497.6 1,359.4 1,097.9 -19% -27%
Source: Sembcorp Marine, DBS Vickers

Page 2
Company Focus
Sembcorp Marine

Outlook to Seadrill in 3Q10 for US$356m, excluding certain
owner-furnished equipment.
YTD order wins of S$853m has been weak, vs. expected b) Unbooked profits from the Songa Eclipse (ex Larsen Rig
non-Petrobras orders of S$2.5bn. This has led to a decline in I), a project worth US$640m, with an estimated profit
net orderbook from S$5.0bn as end March 2010 to S$4.3bn of S$80m which will likely be recognized in FY11 upon
as at June, to be recognized up to end 2012. With 5 months completion.
remaining in FY10, guidance remains for S$2bn to S$3bn of
order wins this year – excluding contracts relating to Lumpy profits from these two projects back loaded in FY10
Petrobras’ 28 newbuild rig tender. As such, we have cut (from 3Q10 for CJ70) and in FY11 for Songa Eclipse will
back non-Petrobras order wins to S$2bn from S$2.5bn result in higher EBIT margins for the rigbuilding division,
previously. These are likely to be made up of production despite the declining sales.
related projects, as highlighted in the table on the page 4.
Petrobras orders are important for sustainability of earnings
Petrobras holds the key to order book growth. SMM has beyond FY11. While near term impact from these orders is
tendered for seven drillships and two semi-submersibles in muted due to the protracted recognition schedule, these
May 2010, competing with six other yards for a slice of contracts are significant for future earnings beyond FY11.
Petrobras’ orders. Assuming each rig is valued at US$700m, Coupled with expected higher shiprepair sales with the new
this could mean potential orders of around US$5bn for the mega yard at Tuas kicking in from 2H12, we project SMM to
batch of drillships and US$1.5bn for the 2 semi- post S$610.6m net profit in FY12, +2% y-o-y.
submersibles. The contracts will be awarded soon, given that
both technical and commercial bids have been submitted. SMM’s quarter order wins
Should the Petrobras contracts of seven drillships be
Q uart erly order w ins (S$ m)
awarded to SMM, it will mean a record year in order wins, at
4,500
S$9bn for 2010.
4,000

3,500
Revenue on assumed Petrobras orders deferred due to long
3,000
project lead-time; FY11 earnings forecast reduced. We have
2,500
assumed that SMM will win seven drillships worth US$5bn in
2,000
4Q10. Delivery will be in 8 years, staggered from 2014 till
1,500
end 2018. We expect the first rig to be completed in 4½
1,000
years from the date of award (i.e. delivery in 2014), and the
subsequent rigs delivered at intervals of around 6-9 months. 500

Given SMM’s policy to recognize revenue only upon 0
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
achieving 20% completion of the project, coupled with the
longer lead-time required to start this mega project, the first Source: Sembcorp Marine, DBS Vickers
sign of revenue for the first rig is likely to only kick in from
4Q11 onwards, or only around 3% of the US$5bn order. As SMM’s outstanding order book
a result, we have cut our FY11 revenue and net profit
O ut st anding order book (S$ m)
forecasts by 27% and 17% respectively, to S$4.2bn and
10,000
S$600.6m.
9,000

8,000
Lumpy profit recognition from CJ-70 jackup and Songa 7,000
Eclipse semisub will cushion the drop in FY10/11. We believe 6,000
that the drop in rigbuilding revenue and earnings in FY11 5,000
will be partially cushioned by: 4,000
a) Profits amounting to an estimated S$100m from the CJ- 3,000
70 jackup rig which will be recognized over 3Q10- 2,000
1Q11. To recap, CJ-70 is currently under construction, 1,000
but profits have yet to be recognized as the original 0
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10

owner ran into financial distress. It was eventually sold
Source: Sembcorp Marine, DBS Vickers

Page 3
Company Focus
Sembcorp Marine

List of projects Sembcorp Marine and its affiliates could be in the running for – est US$3bn
Date Estimated value
reported End user / client Requirement Designated usage (US$ m)

23-Jul-10 Petrobras P-62 conversion To produce heavy oil on the NA
Roncador field in the Campos basin

16-Jul-10 Woodside Petroleum Specialized semisubmersible drilling For development wells on 300
unit Woodside's Browse LNG Project off
Western Australia

15-Jul-10 Heerema Marine Hybrid heavylift pipelay vessel - For offshore pipelaying activities. 200-250
Contractors Ulstein Sea of Solutions design;
similar design to the DP3 5000
tonne heavylift vessel Borealis under
construction at Sembawang
Shipyard

9-Jul-10 Chevron 1x 57,000-tonne processing Wheatstone liquefied natural gas NA
platform project in Western Australia

25-Jun- Total Engineering, procurement, Field developments in the Offshore NA
10 installation and construction works Mahakam area off East Kalimantan
for wellhead platforms and subsea in Indonesia
pipelines.

11-Jun- Aramco 13 wellhead platforms to be Wasit programme, giant gas project >1,000
10 installed on previously awarded covering the Arabiyah and Hasbah
jackets, as well as 2 tie-in platforms fields
and hundreds of kilometers of
pipelines

8-Jan-10 Transocean 208m long drillship with new NA >500
design specified by Transocean.
Voyager-class vessel will feature an
X-bow and a single collapsible
derrick to help pass through the
Panama Canal.

Source: Upstream, DBS Vickers

Page 4
Company Focus
Sembcorp Marine

Maintain BUY, with revised TP of S$5.10. Potential catalysts include 1) new offshore contract wins,
Our fair value for SMM has been adjusted to S$5.10. specifically the award of Petrobras’ tenders in 3Q or 4Q10,
We have rolled forward our valuation pegs to blended and 2) new contracts for Cosco Corp. Maintain BUY on
FY10/11 PE (previously FY10 PE), and factored in the recently SMM.
revised TP for Cosco of S$1.88 (previous S$1.80).

Sum-of-parts valuation for Sembcorp Marine
Blended Est.
FY10F FY11F FY10/11F market Value per
PATMI PATMI PATMI value share
Components % stake (S$ m) (S$ m) (S$ m) (S$ m) (S$) Basis

Ship Repair - SMM ex CSG 100.0% 56.9 65.9 61.4 1,105.5 0.53 18x blended FY10/11 PE
contribution
Offshore - SMM ex CSG 100.0% 576.3 466.4 521.3 8,351.7 4.03 16x blended FY10/11 PE
contribution
30% share of CSG net profit - 30.0% 26.7 33.8 30.3 544.6 0.26 18x blended FY10/11 PE
ship repair
30% share of CSG net profit - 30.0% 14.8 31.3 23.0 345.7 0.17 15x blended FY10/11 PE
shipbuilding
Stake in Cosco Corp 5.0% 209.4 0.10 Revised DBSV TP of S$1.88

674.6 597.4 636.0 10,556.9 5.10

Target price (S$) 5.10
Implied FY10 PE (x) 15.6
Implied FY11 PE (x) 17.6
Implied Blended FY10/11 PE (x) 16.5

Source: DBS Vickers

Page 5
Company Focus
Sembcorp Marine

Income Statement (S$ m) Balance Sheet (S$ m)
FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F
Turnover 5,725 4,723 4,187 4,549 Net Fixed Assets 678 896 1,249 1,169
Cost of Goods Sold (4,739) (3,781) (3,379) (3,724) Invts in Associates & JVs 268 318 373 441
Gross Profit 986 942 808 825 Other LT Assets 224 224 224 224
Other Opng (Exp)/Inc (124) (179) (134) (146) Cash & ST Invts 1,979 1,822 1,671 1,947
Operating Profit 862 763 674 679 Inventory 1,253 1,033 916 995
Other Non Opg (Exp)/Inc 0 3 0 0 Debtors 229 394 349 455
Associates & JV Inc 25 63 68 80 Other Current Assets 58 58 58 58
Net Interest (Exp)/Inc 31 28 11 7 Total Assets 4,688 4,744 4,840 5,289
Exceptional Gain/(Loss) (11) 0 0 0
Pre-tax Profit 908 857 754 766 ST Debt 12 12 12 12
Tax (151) (151) (128) (130) Other Current Liab 2,623 2,183 1,942 2,005
Minority Interest (57) (29) (25) (25) LT Debt 8 108 158 208
Preference Dividend 0 0 0 0 Other LT Liabilities 84 84 84 84
Net Profit 700 678 601 611 Shareholder’s Equity 1,884 2,252 2,514 2,824
Net Profit before Except. 712 678 601 611 Minority Interests 76 105 130 156
EBITDA 963 909 822 839 Total Cap. & Liab. 4,688 4,744 4,840 5,289

Sales Gth (%) 13.0 (17.5) (11.3) 8.6 Non-Cash Wkg. Capital (1,084) (698) (619) (497)
EBITDA Gth (%) 51.3 (5.6) (9.6) 2.1 Net Cash/(Debt) 1,959 1,702 1,501 1,727
Opg Profit Gth (%) 71.8 (11.5) (11.7) 0.8
Net Profit Gth (%) 62.8 (3.2) (11.4) 1.7
Effective Tax Rate (%) 16.6 17.6 17.0 17.0
Cash Flow Statement (S$ m) Rates & Ratio
FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F
Pre-Tax Profit 908 857 754 766 Gross Margins (%) 17.2 19.9 19.3 18.1
Dep. & Amort. 75 80 80 80 Opg Profit Margin (%) 15.1 16.2 16.1 14.9
Tax Paid (58) (253) (151) (128) Net Profit Margin (%) 12.2 14.4 14.3 13.4
Assoc. & JV Inc/(loss) (25) (63) (68) (80) ROAE (%) 43.7 32.8 25.2 22.9
Chg in Wkg.Cap. (519) (283) (56) (124) ROA (%) 15.1 14.4 12.5 12.1
Other Operating CF 33 0 0 0 ROCE (%) 38.2 27.2 20.5 18.2
Net Operating CF 414 337 558 513 Div Payout Ratio (%) 44.2 50.0 50.0 50.0
Capital Exp.(net) (60) (298) (433) 0 Net Interest Cover (x) NM NM NM NM
Other Invts.(net) 0 0 0 0 Asset Turnover (x) 1.2 1.0 0.9 0.9
Invts in Assoc. & JV 0 0 0 0 Debtors Turn (avg days) 22.6 24.1 32.4 32.2
Div from Assoc & JV 13 13 13 13 Creditors Turn (avg days) 125.4 143.7 140.8 120.7
Other Investing CF (13) 0 0 0 Inventory Turn (avg days) 81.7 112.7 107.8 95.7
Net Investing CF (61) (285) (420) 13 Current Ratio (x) 1.3 1.5 1.5 1.7
Div Paid (233) (310) (339) (300) Quick Ratio (x) 0.8 1.0 1.0 1.2
Chg in Gross Debt (202) 100 50 50 Net Debt/Equity (X) CASH CASH CASH CASH
Capital Issues 10 0 0 0 Net Debt/Equity ex MI (X) (1.0) (0.8) (0.6) (0.6)
Other Financing CF (4) 0 0 0 Capex to Debt (%) 299.7 247.9 254.4 0.0
Net Financing CF (429) (210) (289) (250) Z-Score (X) 2.3 4.2 4.3 4.1
Net Cashflow (75) (157) (150) 276 N. Cash/(Debt)PS (S cts) 94.6 82.2 72.5 83.3
Opg CFPS (S cts) 45.0 30.0 29.7 30.8
Free CFPS (S cts) 17.1 1.9 6.1 24.8
Quarterly / Interim Income Statement (S$ m) Segmental Breakdown / Key Assumptions
FY Dec 3Q2009 4Q2009 1Q2010 2Q2010 FY Dec 2009A 2010F 2011F 2012F
Turnover 1,520 1,343 1,359 1,098 Revenues (S$ m)
Cost of Goods Sold (1,314) (903) (1,168) (861) Rig Building (newbuilds) 706 655 748 798
Gross Profit 207 440 191 237 Offshore & Conversion 1,343 1,103 2,033 2,325
Other Oper. (Exp)/Inc (33) (53) (32) (35) Ship repair 3,635 2,926 1,365 1,385
Operating Profit 174 387 160 202 Shipbuilding (newbuilds) 0 0 0 0
Other Non Opg (Exp)/Inc 0 0 0 3 Others 41 39 41 41
Associates & JV Inc 8 (10) 12 14 Total 5,725 4,723 4,187 4,549
Net Interest (Exp)/Inc 1 22 13 5
Exceptional Gain/(Loss) 0 (4) 0 0 Key Assumptions
Pre-tax Profit 183 395 185 225 Order wins (S$ m) 1,245.0 8,860.0 5,000.0 4,000.0
Tax (31) (62) (33) (41)
Minority Interest (7) (35) (3) (7)
Net Profit 145 297 149 176
Net profit bef Except. 145 301 149 176
EBITDA 200 396 193 241

Sales Gth (%) 1.5 (11.7) 1.2 (19.2)
EBITDA Gth (%) 1.3 97.7 (51.4) 25.2
Opg Profit Gth (%) 4.4 122.5 (58.8) 26.8
Net Profit Gth (%) 4.8 105.5 (49.9) 18.4
Gross Margins (%) 13.6 32.8 14.1 21.6
Opg Profit Margins (%) 11.4 28.8 11.7 18.4
Net Profit Margins (%) 9.5 22.1 10.9 16.0

Source: Company, DBS Vickers

Page 6
Company Focus
Sembcorp Marine

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

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Page 7
Company Focus
Sembcorp Marine

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