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SembCorp Marine’s S$1.66b Quarter

Ser Jing - Sembcorp Marine First Quarter Result, Full Steam Ahead (pic) Marine engineering firm Sembcorp Marine (SGX: S51) announced its third quarter earnings yesterday evening and posted great jumps in revenue and profits.

The company, a majority-owned subsidiary of fellow Straits Times Index (SGX: ^STI) constituent Sembcorp Industries (SGX: U96), earns its keep mainly from the repairing, building, and conversion of ships and rigs.

Some basic numbers

For the three months ended 30 Sep 2013, Sembcorp Marine brought in S$1.66b in revenue, representing a huge 86% increase over the corresponding figure a year ago. Profits on the other hand, moved up 12% to S$130m.

The company’s top-line had grown mainly due to higher revenue coming from the rig building sector, which surged by 167% from S$428m a year ago to S$1.14b. Sembcorp Marine had five rigs achieve revenue recognition: a well-intervention semi-submersible rig; a harsh-environment semi-submersible rig; and three jack-up rigs. In comparison, the third quarter of 2012 only saw one jack-up rig achieve recognition.

The repair sector was another bright-spot as turnover grew 34% from S$153m to S$204m, unlike the conversion and offshore sector.

The latter’s revenue for the quarter declined 10% year-on-year to S$271m due to two factors: the economic value of the projects handled were smaller and revenue recognition for the projects came in later.

As mentioned earlier, SembCorp Marine’s bottom-line had grown at a much slower pace compared to its top-line. There were a couple of big factors at play.

Cost of sales had doubled from S$725m to S$1.48b, squeezing the company’s gross profit margins. As we travel down the income statement, the company also saw a 67% increase in tax expenses to S$32.7m.

Those two expenses – cost of sales and tax expenses – were big culprits in SembCorp Marine’s sliding profit margins.

The company’s declining profit margins was a problem I have highlighted previously and it’s something investors should keep an eye on.

Operational highlights and the balance sheet

SembCorp Marine had managed to bring in S$292m in operating cash flow for the quarter, but there were scarcely any free cash flow left as capital expenditures came up to S$292m as well.

Nonetheless, the company’s balance sheet still remains really strong with S$1.76b worth of cash on hand while carrying only S$634m in total debt. That’s also an improvement over 12 months ago, when it only had S$1.41b in cash and S$333m in debt.

What’s next for SembCorp Marine

As of 30 Sep 2013, the company has secured contract orders worth S$3.9b since the start of the year. Its order book now stands at S$13.5b, a 6.4% increase from S$12.7b at the end of 2012.

Some of these orders extend all the way till 2019 and while it’s great to see SembCorp Marine ring in the register as more work comes its way, the onus is still on the company to arrest the slide in profit margins.

The company commented: “The long-term industry fundamentals for the offshore and marine sector remain sound underpinned by exploration activities with increasing interests in harsh environment and field development programmes. Demand for high specification and ultra-deepwater rigs with advanced technical features are expected to remain strong. SembCorp Marine with its track record and proven capabilities is well-positioned to benefit from the opportunities in this sector.”

In addition, investors can also look forward to greater contributions from the company’s new Sembmarine Integrated Yard @ Tuas in Singapore, which started operations in August this year.

According to SembCorp Marine’s press release for its third quarter earnings, the yard is equipped with 4 VLCC (very large crude carriers) size drydocks with a total capacity of 1.55m deadweight tonnes as well as finger piers and basin lengths totalling 3.9km.

The yard is capable of undertaking a whole host of works related to Floating, Production, Storage and Offloading (FPSO) conversions, in addition to servicing many different kinds of vessels such as VLCCs, new generation of mega containerships, LNG carriers, semi-submersible rigs, and more.

Valuation

At 9:15am in the morning, the market doesn’t seem too happy with the company’s results as its shares are down 2.5% to S$4.38 from yesterday’s close even as the Straits Times Index is up slightly by 0.1%.

At that price, shares of Sembcorp Marine are valued at 17 times trailing earnings and carry a dividend yield of 3% based on its pay-out last year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.