Sembcorp Marine-GS

Above expectations, but reduced dividend payout, retain Conv. Sell
What surprised us
FY2008 net profit came in at S$430m, vs GS S$392m, largely due to higher
than expected margins. For the full-year, Sembcorp Marine produced
higher operating margins of 9.9% vs GS 8.4% forecast, on higher
operational efficiency mainly rig building, and this largely drove the
overall 79% yoy earnings growth, notwithstanding Cosco Shipyard
Group’s poor performance in 4Q (S$44m losses). Excluding one-offs, this
year it had another S$44m forex-related loss, yoy core growth would be
lowered to a smaller 31%, vs Keppel unit’s 35% core growth. Despite the
solid results, and S$1.8bn net cash, Sembcorp Marine declared a lower-
than-expected final dividend of only 6cents, vs GS 9cents forecast, as the
group cut back its dividend payout to only 53%. The lowest it has ever
been was in 1997 with 57%; historically, payout ranges between 70-90%.
What to do with the stock
We fine-tune our earnings estimates, but retain our P/B-based 12-m TP of
S$1. We were negatively surprised by the lower dividend, and we think the
market may need to adjust expectations down significantly - we are cutting
our dividend payout from previous 75% guidance to 50%, for now. The
emerging trend of shipyard financing, like Seadrill, Petromena recent
delayed payment renegotiations, could put more financing pressure on the
balance sheet, and risk dividends further. Though Sembcorp Marine
attributes recent industry weakness to credit-related issues, we think it is
about to get worse as the drilling industry heads into a downturn. Sharp
deterioration in day rates and rig asset prices could spur cancellations and
contract renegotiations. Retain Sell (Conviction List). Key upside risks:
strong oil price rebound, stronger-than-expected new order momentum.