KIM ENG - Questions Still Unanswered

♦ For the record ? an 82% rise in 3Q07 net profit

SembCorp Marine?s (SMM) 3Q07 results announcement was overshadowed by analysts and journalists seeking clarification for the announced forex losses from unauthorized transactions. For the record, however, SMM reported 3Q07 net profit of S$81.4m, up 82% from 3Q06 but down 5% sequentially. This dip is within expectations, due to differing profit recognition cycles of various projects. YTD net earnings of S$240.2m also puts SMM?s earnings trajectory in line with our full-year forecast of S$335.6m. Actual shipyard operations continue to be unaffected by the forex loss issue, and, according to SMM, no customers were having second thoughts about their orders, nor has the level of enquiries abated.

♦ But the focus was clearly on the forex losses

With regards to the unauthorized forex losses, SMM has stated that it has now closed its open positions on the transactions with 11 different banks. The current loss stands at US$220m, which is higher than the marked-to-market loss announced earlier of US$165m. This is due to further currency movements since the announcement. The last of the outstanding transactions could only be closed at around 3am the preceding morning. Again, this is in addition to an earlier related forex loss of US$83mwhich was already paid to one of the banks before the transactions were discovered. However, based on its preliminary investigations,SMM has stated its position that the transactions are not valid and binding, and that it is therefore not liable for the loss. As such, it is not making any provisions for any liability in its accounts. As for the US$83m already paid out, the paid-out cash position will be offset by an entry into receivables in the balance sheet, with nothing taken to the profit and loss.

♦ We still advocate caution on this potential overhang

SMM must be reasonably confident of its own standing for it to state categorically that it is not liable for the losses even as investigations and potential litigation are being carried out. However, we believe that in the interest of prudence, we would continue to look upon the potential total liability of around S$440m as an overhang. SMM would not commit to or comment on any potential timeline to its investigations or a possible resolution of the matter. Realistically, however, the issue may drag on for several months or even years. We would also point out that the current potential liability of around S$440m may be inflated substantiallyby legal and administrative fees, as well as interest costs.

♦ Maintain HOLD, TP at S$4.80

We are keeping our forecasts for FY07 unchanged, as mainstream operations are unaffected by the forex loss situation. We are also retaining our sum-of-the-parts valuation of S$4.80/share and our HOLD recommendation. Sentiment on the stock may improve in the wake of SMM clarifying its position somewhat; we will, however, advocate caution. SMM?s management has not yet been able to clarify how its risk controls apparently were unable to prevent this situation from occurring. We will continue to monitor developments.

Pipavav is building 85 hectare shipyard, has secured orders worth US$1b

This will be its first investment in India, one of the world's fastest growing economies, and is seen as an investment in the country's future.

SembCorp Marine, which was in the news recently over a scandal involving its finance head and which could lead to huge foreign-exchange losses, said yesterday that it has signed an investment agreement with Pipavav Shipyard Ltd (PSL) and its promoters, SKIL Infrastructure Ltd, to subscribe for 17.5 million shares in PSL at 45 rupees apiece.

Explaining the rationale for the purchase, SembMarine's senior vice-president of corporate development Ng Thiam Poh said: 'Semb- Corp Marine was invited by SKIL to be its strategic partner and subsequently entered into a technical assistance agreement with PSL. SembCorp Marine's role includes advising on the design of the shipyard, its layout and infrastructure, setting up of the management and technical systems and to provide training to PSL.'

'With this investment, SembCorp Marine would be able to establish other business ventures in close collaboration with our Indian partners and to grow our marine and offshore business in India,' added Mr Ng.

Located within the vicinity of Pipavav Port, Gujarat in India, PSL is strategically located on the west coast of India along the Middle East-Singapore sea route.

The 85-hectare shipyard is poised to be one of the largest shipbuilding yards in India.

The shipyard to-date has secured contracts worth a total of US$1 billion for the construction of 22 panamax-sized ships with options for an additional four vessels.

Currently, the shipyard infrastructure is under development and construction and is scheduled for completion in September 2008.

This comprised a 600-metre long VLCC drydock equipped with shipbuilding workshop facilities and equipment.

The shipyard infrastructure is geared towards the building of large vessels up to VLCC size in the future.

Business Times 30th Oct 07

 

SEMBCORP Marine, the world's second largest builder of offshore oil rigs, is buying a 3.31 per cent stake in an Indian shipyard for $29.12 million.