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Strong Competition Causes Margin Compression At Sembcorp Marine In First Quarter

Ser Jing - Sembcorp Marine First Quarter Result, Full Steam Ahead (pic)Sembcorp Marine (SGX: S51) is one of the largest marine and offshore engineering company in the world. It is part of the conglomerate Sembcorp Industries’ (SGX: U96) group of companies, competing directly with the offshore and marine sector of Keppel Corp (SGX: BN4). It announced its first quarter earnings on 2nd May 2014.

Operating Result

On the surface, Sembcorp Marine saw a 27% jump in its turnover year on year for the quarter, climbing from S$ 1.05billion to S$1.335billion. The growth in revenue is mainly coming from its rigs and offshore platform segment. However, due to a much larger increased in its cost of goods sold, its gross margins shrank from 14.8% to 12.8%. With a larger “other operating income” last year, the operating profit for the first quarter this year only improved by 3.8% to S$148.8million. Sembcorp Marine achieved earnings per share growth of 3.2% to 5.87 cents per share.

On the balance sheet side, Sembcorp Marine maintained its strong net cash position. It has a net cash position of S$ 1.47billion, an improvement from last quarter net cash position of S$ 928.8billion. This shows the strength of the company’s business model as it is cash generating and require only a low debt ratio to operate efficiently.

Segment Breakdown

Most of the company’s earnings are primarily from its ship and rigs repair, building, conversion and offshore. The segment contributes 98.5% of its revenue and 93.9% of its profits. The company also runs a much smaller ship chartering business which only contributes 0.9% of its total revenue and 3.4% of its profits.

Foolish Takeaway

The company currently has a net book order of S$ 12.9billion of projects, enough to keep themselves busy till 2019. Furthermore, the phase 1 of its yard in Tuas has started operating since August 2013, and that might help the company with its Very Large Crude Carrier (VLCC) business. On the negative side, the group might still be facing resilient competition and that might be a drag on margins going forward.