Sembcorp Marine - Brace For Dividend Cut


1H15 PATMI met 43% of our FY15 forecast as revenue disappointed with some drilling rigs’ deliveries deferred. Maintain NEUTRAL with a lower SGD2.60 TP (from SGD2.70, 4% downside) based on 12x blended FY15F-16F P/Es. Operating margin was encouraging, having ticked up to 12% in 2Q15 (1Q15: 10.6%). The half-year dividend was trimmed to 4 cents from 5 cents, prompting us to lower our yield expectations. We trim our FY15F/FY16F earnings by 8%/7%.

Rig building dips, repairs jump
Sembcorp Marine’s (SembMarine) 2Q15 revenue fell 7% QoQ as recognitions slowed following some delivery deferments. The outperforming segment was the repair business, which delivered a 66% QoQ and 11% YoY jump in revenue. The weak bottomline was largely due to a SGD5.4m exchange loss and a SGD16.9m currency forward marked-to-market charge in 2Q15, without which SembMarine would have met 47% of our original earnings forecast.

Encouraging uptick in operating margin
SembMarine’s operating margin rose to 12% in 2Q15 from 10.6% in 1Q15, which we believe was the combined result of higher contribution from higher-margin repair business and lower revenue from rig building, which tends to have lower margins. If the repair revenue momentum can be maintained, the company’s operating margin should be sustainable at this level.

Conserving cash
SembMarine trimmed its half-year dividend to 4 cents from 5 cents a year ago, citing lower earnings. We take this as a signal that the full-year dividend will also be cut, and we now expect 10/11/12- cent dividends for FY15-17, down from a flat 13 cents, based on the c.50% payout ratio range of the last three years. We believe the company will need the cash to pay down its debt and to fund the development of Phase 2 of the new Tuas Yard.


Technical Analysis
Daily Chart
Trimming estimates
We lower our FY15-17 order win forecasts to SGD2.0bn/SGD2.5bn/SGD2.5bn from SGD2.0bn/SGD3.0bn/SGD4.0bn respectively, but raise our repair revenue assumptions by c.5%, with a net effect of trimming our FY15/FY16 earnings estimates by 8%/7% respectively. Maintain NEUTRAL with a lower SGD2.60 TP (from SGD2.70, 4% downside) based on 12x FY15-16F P/E. Key risks are order wins, revenue recognition, and rig delivery deferments. (Read Report)

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Source : RHB Research

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