What Does SembCorp Marine Ltd’s Latest Earnings Tell Us about Its Future?

Ser Jing - Sembcorp Marine First Quarter Result, Full Steam Ahead (pic)

Sembcorp Marine Ltd (SGX: S51), the marine engineering subsidiary of SembCorp Industries Limited (SGX: U96), announced its second quarter results yesterday.

Investors have been bearish on the company for a while now with its share price dropping almost 20% from around S$5.00 in August 2012 to S$4.01 currently. That has happened against the backdrop of the company’s profit declining from S$752 million in 2011 to S$556 million in 2013.

Has the market been right in its assessment of the company’s prospects, or have investors collectively written off the company prematurely?

Result highlights

Sembcorp Marine boosted its revenue for the first half of this year by 23% year-on-year to S$2.68 billion. Similarly, its gross profit also grew by 22% to S$364 million, indicating that the company did not suffer any significant gross margin compression. However, Sembcorp Marine only experienced a 4.7% increase in its operating profit to S$303 million compared to a year ago (net profit similarly grew at a slower pace of 4.3% to S$254 million as compared to revenue).

In the first half of 2013, Sembcorp Marine had sold some assets, clocked huge foreign exchange gains, and enjoyed high scrap and rental income – these all either did not take place in the first half of 2014 or had occurred on a much smaller scale, ultimately leading to a 70.8% decline in the “Other” operating income line.

If Sembcorp Marine’s operating profit were adjusted for non-recurring items like foreign exchange gains and the sale of assets, the company’s operating profit actually improved by 20% year-on-year. That’s quite an amazing feat for a company of this size.

Another sign of strength with the company resides in its balance sheet: As of 30 June 2014, Sembcorp Marine has a net cash (i.e. total cash minus total debt) position of S$883 million.

Future prospects

Sembcorp Marine ended the first half of 2014 with a net order book of about S$12.7 billion worth of projects on its hands, a decline from S$14.4 billion a year ago. Nonetheless, the company still expects stable growth from the offshore exploration and production sector.

Although there is still the possibility of a slowdown in demand for its services and more aggressive competitors entering its space, the company is confident that it is well positioned to provide quality and high-value services to its customers.

Sembcorp Marine is able to gain market share in its ship repair business. However, the market condition for this sector is still weak.

All told, the company is seeing huge growth in its Rig Building and Fixed Platform segments while seeing some weakness in its Offshore & Conversion and Ship Repair segments.

Foolish Summary

Sembcorp Marine has experienced some impressive growth so far this year. A number of its business segments are still growing rapidly while the ship repair market might yet turnaround. It does seem that Sembcorp Marine has more room to grow into.

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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 Stanley Lim doesn't own any shares of companies mention above.