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Sembmarine

Really hanging at 4.37 support. Think should fail

This is the most lousy quarter in past 5 year. Even 2008 to 2009 downturn is also better.

Hi there im thinking of buying at 4.22...my first target buy was 4.40..but didnt snag any as noticed the plunge was pretty deep..any guys here think it can dip to 4.22.yr feedback is appreciated..thank u kindly..

From Lim and Tan ... ...

" Timing issue at the rig building unit remains the story for the 3rd consecutive quarter, with the delivery of one semi-sub Songa Eclipse in Q3 ’11making the y-o-y comparison difficult. Revenue at the Rig building division fell 52% to $428.4 mln."

It's true to be real. I recalled the annoucement did mentioned by ms judy han that the Q311 will not be repeated in following ...

She did warn the investors before hand. That's why the stock had not been moving for mths towards the Q3 12. Let's see Q4 12 plus the Dividend (15 Cents).

Real money can be make from ship repair and conversion type (simple job, no delayed of payment). keppel just secured one.

Think they had limited the resources like manpower, yard space to cope both SRC /SB. had to weight the balance.

I think $4.30 -$4.20 is a good buy. .. ...

70% increase in ship repair for further new yard.

DBS trims Sembmarine

However analyst Janice Chua has maintained a buy rating on the Singapore-listed company in the belief that any downturn is likely to be shortlived.

SembCorp booked a profit of SGD 115.5m ($94.3m) in the three months to 30 September, down from SGD 222.5m seen in the same period a year ago.

Revenue fell away by a third to SGD 892.4m as income from its rig building division plunged by over 50%.

The result was below expectations due to slower than-expected drawdown of its orderbook on new projects, Chua said.

She has cut her target price to SGD 5.20 per share from SGD 5.85 previously but added that the outlook remains bright for the company in the longer term.

“While the stock could come under near-term pressure due to earnings cut on lower margin guidance, SMM remains a prime beneficiary of the current upcycle for demand of deepwater, harsh environment rigs,” said Chua.

“With a net orderbook of SGD $12.1bn, buoyed by record FY12 YTD order wins of SGD $9.1bn, revenue visibility is strong.

“However, we believe margins could be under pressure in the range of 10% to 13% as new rig designs are affected by the impact of learning curve in the initial ramp up phase.

“On a brighter note, higher shiprepair sales from capacity expansion at the new Tuas yard will raise the overall blended margins for the group in the long run.”

I bought some today at 436, Q 435, then climb so buy 436. After that it fall again and zoom zoom.

New123 ( Date: 07-Nov-2012 14:11) Posted:

r u vested? anybody picking up sembmar ? seems to hld for now..

krisluke ( Date: 06-Nov-2012 21:17) Posted:

Lim & Tan

SEMB MARINE
S$4.69-SWMS.SI

 Timing issue at the rig building unit remains the story for the 3rd consecutive quarter, with the
delivery of one semi-sub Songa Eclipse in Q3 ’11making the y-o-y comparison difficult. Revenue at the
Rig building division fell 52% to $428.4 mln.

 The 27% drop in associate contributions (largely the 38% drop at Cosco Singapore), and the sharp rise in forex loss to $14.82 mln from $2.1 mln a year ago also dragged down the bottom-line.

 Net profit fell almost 50% to $115.51 mln, bringing the total for the first 9 months to $371.4 mln, off 29% y-o-y. Trailing PE is 16.3x.

 Fact however remains that, like its competitor Keppel Offshore Marine, SMM has secured loads of new contracts (for rigs, semi-subs, drillships, conversions) so far this year, totaling a record $9.1 bln, resulting in corresponding record net order book of S$12.1 bln, for delivery through 2019.

 And the good thing is, as investors wait for earnings to flow through, there is the enticing 5.3% yield, based on likely unchanged final of 20 cents, after the 5 cents interim already paid.

 Maintain BUY.

Target price S$6.10
Citi
Alert: Another EPS Miss on Slower Revenue Recognition

 Est. Below Street– Third qtr results underscore our below-consensus profit forecast (our FY13-14E estimates are currently 10-12% below Street forecast) and why earnings trend is unlikely to move in tandem with stronger-than-expected order wins. The sharp sequential decline in SMM’s 3Q12 top line came as a surprise to us, but this was largely to do with the timing of revenue recognition. With the recognition of its first drillship order and another two or three jackups expected in the fourth qtr, the group is poised for a strong QoQ rebound. In the near term,
however, we see some risks of downside volatility on the back of the weaker-than expected quarterly results and further consensus downgrades.

 3Q11 Results – 3Q12 PATMI of S$116mn (-48% YoY -19% QoQ) was 28% lower than our est. and approximately 37% below consensus. The weaker-than-expected set of results was primarily due to lower revenue recognition from rig building (3Q12: S$428mn -52% YoY -35% QoQ) as only one jackup (3rd of six Noble units on order) achieved the initial recognition milestone during the Sep qtr (yet to
commence recognition on four jackups and three accommodation/ well-intervention semisubs secured since 2011). On a sequential basis, mgmt noted that the comparatively stronger rig building turnover in 2Q12 was underpinned by initial contributions from a high-value CJ-70 jackup as well as two jackups that had been speculatively built (sold to Safin and Gulf Drilling).

 Operating Margins – 3Q12 operating margin of 14.1% was about 100 bps higher QoQ as ship conversion and repair constituted a larger portion of turnover mix (3Q12: 51% vs 2Q12: 45%). Mgmt is maintaining full-year margin guidance at about 14% - despite noting that the group is expected to achieve initial recognition on its first drillship project in 4Q12 (with more conservative profit recognition). Margins
may continue to moderate into 2013, although there is potential for some upside surprise in 2014 on the back of full-year contributions from SMM’s new integrated yard at Tuas (annual ship repair revenue estimated to grow ~70% to S$1.1-1.2bn).

 Order Win Prospects – SMM has secured S$9.1bn in new order wins ytd (~65% from Sete Brasil drillship orders), taking order backlog to S$12.1bn with deliveries extending into 2019. Enquiry levels remain healthy and mgmt is optimistic that orders for more semisubs (accommodation/ well intervention/ drilling units) will materialize and boost order activity moving forward.

SembCorp Marine

Valuation

We value SembCorp Marine on a sum-of-the-parts valuation, giving us a target price of S$6.10. For the core O& M business, we use 17x average FY12-14E P/E, close to +1 standard deviation of SMM's historical mean (since 2001) to reflect the prospects of increased order win momentum in FY12-14E (vis-à-vis FY11). We derive our fair value estimate for SMM's 30% stake in Cosco Shipyard Grp from our
valuation for COS' shipyards. We value SMM's 5% stake in COS based on our COS target price.

Risks

The cyclical nature of the O& M business may result in significant earnings volatility and the key downside risks to our investment thesis on SMM are: 1) Slippages or delays in contracts under execution 2) Margin pressures arising from fall in rig prices/ sharp increases in unhedged raw-material prices 3) Higher than expected order cancellations or postponements 4) Lower than expected new orders secured and 5)Difficulty in collecting customer receivables.

Upside risks include:

1) Larger than expected order wins

2) Better than expected margins. If any of these risk factors has a greater downside impact than we anticipate, the share price will likely have difficulty attaining our target price. Conversely, if the impact of any of these upside risks is greater than we anticipate, the stock could exceed our target price.

Macquarie on Sembcorp Marine

Target S$4.70

Sembcorp Marine

Lumpy revenues hurt quarterly estimates

Event

 Delay in revenue recognition saw a 30% below estimate revenue and earnings number from SMM in its 3Q12 results. However, these projects will be recognized in 4Q12 and 2013.

Impact

 Why did revenues come 30% below estimate in 3Q12?: SMM hasn’t yet started work on 4 Jack-up orders from Noble that it received in 2011. In addition, delivery of 1 Jack-up order has been pushed from Dec 2012 to Jan 2013 which means re-adjustment between quarterly revenues.

 Will full year revenues be impacted?: Not by much. We have reduced full year estimate by only 4% as we think 4Q12 will be substantially higher (+36%QoQ), also due to 1st time revenue recognition from Petrobras’ Drillship.

 Will we see a big jump in revenues in 2013 and why?: Yes, we expect 42% jump in total revenues in 2013. SMM will start work on 4 new Jack-ups and 3 new Semi-subs in 2013. In addition, it will deliver 7 Jack-ups in 2013. This means that the revenues from rig building will jump by almost 85% to S$3.9bn in 2013 from S$2.1bn in 2012.

 Positive margin surprise in the quarter Moderating margin estimates:
SMM reported strong 14.1% margin in 3Q12 after 2 weak quarters. We are moderating margin estimates from 14.0-14.5% earlier to 13.5-14.0% now given that we think there will be competitive pressure on new orders.

Earnings and target price revision

 Reducing earnings by 8% for 2012 on lower margin estimates (13.5% vs 14.1% earlier). No changes to 2013 estimates. No change to target price.

Price catalyst

 12-month price target: S$6.00 based on a RNAV methodology.

 Catalyst: New orders

Action and recommendation

 Getting quarterly revenue recognition right is not possible It’s important to focus on the annual numbers: Due to constant shifting of projects by 1 or 2 months, getting quarterly revenues right is not possible in our view, which is why investors should not lose sight of the bigger picture. Revenues will see a big jump in 2013 due to reasons explained above which will flow down to earnings in our view.

 Revenue and earnings profile will only get better from here: A 40% jump next year should be followed by another 5-10% earnings growth in 2014 and 2015, which implies a strong earnings CAGR of 19% over 2012-2015E.

 A very healthy order book More in the pipeline: SMM has S$12.1bn of order book now (14 Jackups, 3 Semisubs and 6 Drillships) with an
accommodation Semisub order from Prosafe in the pipeline for 4Q12. We expect SMM to announce a couple of new Semi-sub orders in 1Q13.

Why we prefer SMM to KEP

1) SMM has a much stronger earnings growth profile over next 3 years. A big spike in SMM’s order book this year will result in strong revenue and earnings growth over the next three years in our view, as high as 19% earnings CAGR from 2012-15E vs a 0% growth for KEP
(KEP SP, N, S$10.80, TP:S$11.60).

We think KEP’s earnings growth will be much inferior as it struggles to maintain its high order book and also a Jack-up driven order book which will mostly be delivered over next 18 months.

2) SMM’s venture into lucrative Drillship market

SMM has taken a backdoor entry into the lucrative Drillship market via orders from Petrobras that have to be built in Brazil. Given that the Drillship market has always been dominated by the Korean yards (given their large yards and experience), this was the only route possible for a new entrant in our view.

Although a high risk, high return strategy, we think if SMM is able to deliver the 1st Drillship to Petrobras on time in 2Q15 and is able to showcase a more efficient design vs what the Korean yards offer, a new segment would open up to SMM. Other oil majors might also come to SMM starting 2015 for new Drillship orders to be built in Singapore.

3) SMM’s new shipyard in Singapore gives margin upside

While we expect the overall O& M business’ margin profile to be very similar for KEP and SMM (around 14%), we think the upside risk lies with SMM given that its new yard in Singapore can potentially double its ship repair revenues which are the highest margin in nature (20-25% EBIT margin business vs 10-12% for rigs).

SMM makes ~S$650m in ship repair revenues annually which could potentially double to S$1.3bn if it is able to get more ship repair jobs once the new yard opens next year. In comparison, KEP has been getting S$1.3-1.5bn of ship repair revenues annually. With higher capacity, we think SMM would be competing for a few ship repair jobs that KEP has been getting while also attracting some new jobs that have otherwise been going to Chinese and Middle-eastern yards.

4) SMM has a more balanced order book mix
We think SMM’s current order book is more balanced and has higher quality contractors on the book. While KEP does not have any Semi-subs on its order book now ex-Brazil, SMM has 2. KEP’s order book has 31 Jackups versus 15 for SMM but SMM’s orders are mostly from top-tier contractors in the US and Norway – the likes of Atwood, Seadrill and Noble.

5) Higher chances of getting a special dividend through SMM
SMM’s net cash balance sheet and more pro-dividend payout management has allowed it to declare special dividends in last 2 years, thus taking the div yield to 6-7% in 2010 and 2011. We believe SMM could continue with its special div policy and the quantum would depend on the capex levels.

Although for 2012 and 2013, SMM’s capex would go up to S$600-700m annually from a normal average of S$150m annually (due to investment in 2 new yards in Singapore and Brazil), we think the management would still give some special dividends given the robust net cash position.

6) SMM is the cheaper and pure play

 SMM’s P/E multiple deserves to re-rate given high 16% PAT CAGR return over next 3 years:
KEP and SMM are both trading at ~13x 1 year forward earnings despite SMM having a much stronger earnings growth momentum. On P/E, we believe SMM should trade at 1 standard deviation above its 5 year mean levels, closer to 16x.

 Declining ROEs for KEP means P/B multiple expansion would be difficult: KEP is trading at 2.3x 1 year forward P/B which is close to its 5 year mean levels. Given falling ROEs for KEP over next 3 years (from 24% in 2012 to 14% in 2014), we believe there is no room for further P/B multiple re-rating for KEP.

 On the other hand, SMM’s ROEs are expected to stay strong and above the 25% levels according to our analysis and thus SMM deserves to trade at least at mean multiple of last 5 year which is 3.9x vs 3.4x 2013E levels that it is trading now.

Price Target: S$5.40

JP Morgan

3Q12 review: " lower than expected" earnings on slow revenue booking conservative 2013 margin guidance

 3Q12 review: " lower than expected" earnings on slow revenue booking management’s conservative margin guidance of 10-13%
for 2013: Sembcorp Marine reported a lower-than-expected 3Q12 net profit of S$116 mn (down 48%y/y and down 19% q/q). However,
operating margins trended upwards to 14.1% in 3Q12 (excluding FX impact margins would have been even higher at 15.5%).

However management is projecting 2013 margins to be lower than current levels and in the range of 10-13%. Overall, 9M12 earnings came in at S$371million accounting for 63% of our ‘previous’ 2012E earnings estimate and we cut our FY12E/ FY13E earnings by 6.7%/9% with operating margins of 14.1%/13% and a revised Dec-13 PT (rolled forward from Jun-13) of S$5.40.

We see:

(i) higher costs on new yards (SG, Brazil) acting as a drag on medium-term margins and

(ii) ‘learning curve’impact on PBR jobs for SMM (new yard, drillship jobs).

 Key takeaways from analyst briefing:

(i) Lower revenues booked in 3Q12 quarter as

(a) only 1 x JU crossed the 20% initial recognition threshold but

(b) should see revenues on 1st drillship and 2-3 additional orders kick in for 4Q12

(ii) 14-15% operating margins continue to be targeted by management for 4Q12 but lower margins in 2013 (10-13% range)

(iii) need 12-15 months to get Brazil yard up and running so may see fabrication started only by 2H14 on 2nd Drillship

(iv) 3 Jack-up units targeted for delivery in 4Q12 (total of 5 deliveries in 2012)

(v) Tuas yard’s 2 dry docks will kick in by 1Q13 and remaining two by 3Q13 with ship repair of S$1.1-1.2 billion targeted by 2014

(vi) Enquiries are solid and in discussion with customers (not likely to be a single unit but larger)

(vii) Dividend payout likely to be driven by

(a) payout policy (rather than absolute levels) and

(b) capex needs of SMM.

 Stock may see 'near term' pressure on margin concerns: SMM would be trading at 18.4x FY13E earnings at our SOTP-based Dec-13 price target of S$5.4. Key risks to our PT remain order cancellations and weak oil prices.

Barclays on Sembcorp Marine

Price Target SGD 6.50

SEMBCORP MARINE

Strong margins momentum " projects in the pipeline"

The company’s earnings miss masks an otherwise robust operational performance.Sembcorp Marine’s 3Q12 margin of 14% was significantly higher than its regional peers. The severe slowdown in the commercial shipbuilding industry has intensified competition in the offshore rig-building space, with regional yards aggressively bidding for offshore projects.

Despite these headwinds, the Singapore rig-builders continue to deliver sector-leading margins and robust earnings. We continue to like the company for its ability to deliver best-in-class margins and returns.

Sector-leading operating performance: Sembcorp Marine’s operating margins continued to improve sequentially q/q and remain the highest in the rig/ship-building sector. Management reiterated margin guidance for 2012E to be “around 14-15%”, which would imply another likely quarter of sustained margins.

Near-term weakness a good opportunity: We expect the company’s shares to be weak in the near term following this earnings ‘miss’. However, we believe the weakness presents a good value opportunity, with the shares now trading at 15x 2012E P/E,
below the company’s 10-year average of 16x P/E. Increased earnings visibility:

A record year of order wins year to date has driven the company’s backlog to S$14.8bn, a new record, providing further earnings visibility. “There are projects in the pipeline”, was management’s message, highlighting the continued positive outlook for further rig orders in 2012 and going into 2013. Changes to earnings and price target:

We lower our 2012-15E earnings forecasts by 9% on average, to reflect management’s more conservative margin guidance and changes to our cost assumptions. Consequently, we roll over our valuation to 2013E and reduce our price target to S$6.50 from S$7.00 previously.

Sector-leading margins

The third consecutive quarter of margin improvement highlights the company’s position as a leading rig-builder. This is in comparison to many of its regional peers (Figure 1), who are only delivering ‘single-digit’ operational margins.

With management reiterating its mediumterm margin guidance, we continue to expect Sembcorp Marine to outperform its peers operationally.

Valuations looking attractive again

We believe the recent weakness in the shares was a result of a slowdown in rig orders and softness in crude oil prices. We see the current valuations as undemanding for a company with the strongest earnings visibility, positive order outlook and sector-leading margins.

3Q12 results analysis and management update

Sembcorp Marine’s analyst briefing by management focused on the reasons for the lumpiness in revenue recognition following the company’s earnings miss of 28% and 31% vs. ours and consensus estimates.

Key points:

 Earnings miss from revenue recognition timing: 3Q12 net profit of S$116m was down 48% y/y and 19% q/q respectively. This was mainly due to the timing of revenue recognition whereby only one jackup rig achieved initial recognition (20% milestone) vs. three in 2Q12
and compared to the lumpy revenue recognition of a semi-submersible in 3Q11.

 Strong operating margins: Operating margins improved sequentially q/q to 14%, compared to 13% and 12.7% in 2Q12 and 3Q12 respectively. Management reiterated its guidance for 14-15% margin for 2012, while guiding medium-term margins to be at the upper end of a 10-13% range.

 Record year for order wins and backlog: Order backlog for the company was S$14.8bn, after securing S$11.1bn in orders, both new records for the company. Excluding Petrobras orders, orders secured year-to-date was S$4.4bn, up 18% y/y.

 “Expect 4Q revenues to be higher”: With the likely recognition of the Sete Drillship (reaching its 20% milestone) and delivery of Safin’s jackup rig, together with possible further first recognition of other rigs, management expects 4Q12E revenues to be higher than 3Q12.

 Ship repair revenues to recover: Ship repair revenue was S$153m, down 13% y/y. This was also attributable to ‘timing issues’ in revenue recognition and are expected to recover in 4Q12.

 Order outlook still positive: ‘There are projects in the pipeline’ was management’s message with highlights the continued positive outlook for further rig awards. Despite the stiff competition from Korean and Chinese yards, enquiries ‘remain healthy’.

 Singapore yard expansion on track: The yard remains on track to be operational in 2H13, with the two docks now completed and expected to be operational in 1Q13. Remaining portions of the yard are expected to be fully functional by 3Q13.

 Ship repair revenues could double by 2014: With the effective doubling of yard capacity after the completion of the new Tuas yard, the company expects to be able to double its ship repair revenues to S$1-1.2bn in 2014.

Deutsche Bank on Sembcorp Marine

Price target - 12mth (SGD) 4.90

Margin pressure may continue in 2013/14 downgrading to Hold

9M12 PATMI declined 29% yoy to S$371m

SMM delivered weak 3Q12 results with sales declining 32% yoy to S$892m, while PATMI fell 48% yoy to S$116m (vs. our estimate of S$180m). Group sales were affected by lower recognition of rig building projects. In 9M12, SMM’s PATMI declined 29% yoy to S$371m (c. 59% of our FY12E).

We have cut our 2012-14E net income by 8-18% on lower revenue/margin assumptions (see Figure 3). We believe SMM's valuations are currently fair and note our preference for Keppel Corp (S$10.60, Buy, TP S$13.50). Margins may remain under pressure in 2013/14 SMM delivered a slight improvement in operating margins (from 13.1% in 2Q12 to 14.1% in 3Q12), but we believe these margins may be under pressure in 2013/14 as the company executes the drillship contracts in Brazil (SMM is new to drillship construction and the new yard could see some initial teething issues as new facilities typically do).

Further, it will be working on other new offshore asset types such as the accommodation and well intervention semisubs, which may see higher costs due to the learning curve.

Robust O& M prospects

YTD, SMM has won new orders worth S$9.1bn and the net order book stands at S$12.1bn (both new records), with visibility to 2019. Long-term O& M prospects remain robust for SMM as demand for ultra-deepwater rigs, premium jackups, and other related offshore assets remains strong.

Target price lowered from S$5.50 to S$4.90 risks

Our forecasts trim the DCF-based fair valuation of SMM’s O& M business and largely explain the target price decline. Our SOTP-based target price is S$4.90. We use DCF for SMM’s O& M business (RF: 2.5%, RP: 4.5%, COE: 10.1%) and market/implied values for Cosco under the SOTP method.

Upside risks include recovery in global economies, better-than-expected execution, and depreciation of S$ vs. US$. Downside risks include project execution, forex volatility and a sustained fall in oil prices.

9M12 results review

Weak 3Q12 on lower rig building recognition

For rig building, sales in 3Q12 at S$428m were down 52% yoy. The period saw one jack-up rig, the 3rd jack-up from Noble, achieve initial percentage of completion revenue recognition as compared with 2011 which saw the resumption of revenue recognition for one semi-submersible unit, the Songa Eclipse, upon its completion and delivery in 3Q 2011. On a nine-month basis, sales at S$1,486m in 2012 were 7% lower yoy.

Ship conversion/offshore in 3Q12 registered a 29% yoy increase in sales to S$300m. The business unit saw one project, the conversion of FSO Banyu Urip, achieve major revenue recognition with six other projects in varying stages of construction and five units in the planning stage. On a 9M 2012 basis, sales were 26% higher yoy at S$1,065m.

For ship repair, turnover in 3Q12 was S$153 million, down 13% yoy due to the timing of ship repair projects. For 9M 2012, sales were S$474m as compared with S$485m for same period in 2011.

Margins may remain under pressure in 2013/14

We believe SMM’s margins may be under pressure in 2013/14 as it executes the drillship contracts in the new Brazilian yard (SMM is new to drillship construction and the new yard could see some initial teething issues as new facilities typically do). Further, the company will be working on other new asset types like the accommodation and well intervention semisubs (deliveries in 2Q14 and 1Q15, respectively), which may
see higher costs due to the learning curve.

We have modeled operating margins of 13.4% in FY12E, 12.1% in FY13E and 11.9% in FY14E.

Valuation and risks

Our target price is SOTP-based. We value SMM's O& M business through DCF. Our DCF assumptions are as follows: rf 2.5%, rp 4.5%, g 2%, COE 10.1%, and WACC 8.7%.

For the group's other components in Cosco, we have used the market value for its direct
stake in listed COS and derived an implied value for the unlisted Cosco Shipyard Group (CSG) based on the market value for COS (the bulk of the value for COS is derived from CSG).

At our target price, SMM would trade at 16.1x FY13E PER, which is above its long-term historical average of 14.6x (high 29.7x low 3.8x), and we believe justified due to its established reputation and the healthy O& M sector.

Upside risks

1) A better-than-expected recovery in global economies resulting in higher demand for oil and thereby appetite for new drilling and production capex

2) better-than-expected execution driving up margins and earnings

3) SMM's revenues are in US$, hence depreciation of S$ vs. US$ would benefit SMM

4) better-than-expected recovery of the shipbuilding industry could benefit Cosco Shipyard (an associate of SMM), which would in turn benefit SMM

5) a sustained increase in the price of oil.

Downside risks

1) A significant slowdown in the global economy reducing demand for oil

2) cost overruns could hurt margins and earnings

3) appreciation of S$ vs. US$

4) further weakening of shipbuilding prospects 5) a sustained decline in the price of oil.

Sembcorp Marine: Below expectations cut FY12-14F EPS by 12-22% (NEUTRAL, S$4.69, TP: S$4.61)

Jason Saw (+65 6232 3871, jason.saw@sg.oskgroup.com)

Downgrade to Neutral. 3Q12 net profit of S$116m (-19% QoQ, -48% YoY) lifted 9M12 net profit to S$371m (-29%), accounting for 60-62% of ours and consensus estimates. Revenue was lower than expected while operating margin was in-line.

The key takeaway was the operating margin guidance of 10-12% in FY13 due to conservative margin recognition for the drillship project at the initial stage and recognition of non-repeat semisubs.

Sector outlook is still strong but competition is rising as traditional shipbuilders are also eyeing offshore jobs. We cut FY12-14F net profit estimates by 12%/15%/22% respectively.

Downgrade the stock to Neutral with a TP of S$4.61, implying 17.3x FY13F P/E.

Margins in-line bottomline miss on lower revenue. 3Q12 revenue of S$892m was sharply lower (-27% QoQ, -31% YoY) as 3Q11 included lumpy recognition from Songa Eclipse project. Revenue recognition can be lumpy depending on the initial recognition of major projects.

Only one Noble jackup rig achieve initial recognition in 3Q12. 3Q12 operating margin came in at 14.1% (9M12: 13.3%), in-line with our estimates, and would have been higher at 15.4% (9M12: 14.3%) if not for S$11.8m losses from forex and hedges (9M12: -S$30m).

Competition could cap ASP hike margins expansion limited. SMM is seeing strong market fundamentals and is hoping to add more work to its existing order book by end of the year. However, intense competition from shipyard with excess capacity in Korea and China are putting
pressure on margins.

Valuation: We cut our TP by 19% from S$5.70 to S$4.61 primarily due to lower earnings and lower target P/E of 16x on shipyard operations (old: 18x) to reflect rising competition.

In the previous boom, O& M stocks could trade > 20x P/E as the rig upcycle was running in tandem with the boom for commercial shipbuilding, leading to strong pricing power for shipyards.

We think the market dynamics are slightly different now as commercial shipyards in China are struggling and Korean yeards are also competing in the semisub market.