l Equity Research l Asia l Oil Equipment & Services l

6 August 2014

Subsea to Shore
Jack-up rig segment vulnerable to oversupply
Our recent conversations with drillers, rig owners and rig builders point to a more cautious outlook for the jack-up
rig segment despite still-healthy day rates and utilisation.
We expect jack-up day rates to soften in 2015 after a three-year uptrend, as supply of modern rigs exceeds near-term
demand; cumulative jack-up rig deliveries in 2014-16 may reach 125 units and add 24% to global capacity.
Global jack-up rig orders are, therefore, at risk of slowing down jack-up rigs have accounted for 62% and 47% of
Keppel Corps and Sembcorp Marines total orders, respectively, since 2011.
We cut our price targets on Keppel Corp (KEP SP, IL, PT SGD 10.20) and Sembcorp Marine (SMM SP, IL, PT SGD
3.80) on reduced new order forecasts and a lower target PE. We are 18% and 12% below the street, respectively.

Jack-up day rates likely to decline in 2015

Global orders for offshore drilling rigs

10,000

deliveries peaking in 2015 with approximately 60 new units

scheduled for completion globally. While YTD day rates have
held up well for jack-up rigs in the >300-ft category, drillers are
reporting more competition in open tenders compared with a
year ago. We believe a 10-15% decline in rates from the
recent peak is a realistic scenario. The number of rigs retired
or converted to other uses and higher-than-forecast demand
should be mitigating factors.

8,000
USD mn

Almost half the total new supply of jack-up rigs in 2014-16

should be delivered next year. Our database shows jack-up rig

We expect more
quarters of weaker
rig orders

6,000
4,000
2,000
0
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14

Source: IHS, Standard Chartered Research

Jack-up day rates (>300-ft category)

200,000

forecast

150,000
USD

contracts to start declining until new supply is absorbed. This

may result in a decline in jack-up orders for 12-24 months.

100,000

Day rates likely to

soften in 2015 after
a three-year
uptrend

The bottom line

Wai Mun Leong

Akash Gupta

+65 6596 8509

Equity Research
Standard Chartered Bank, Singapore Branch

+65 6596 8513

Equity Research
Standard Chartered Bank, Singapore Branch

Jan-15

Jan-14

Jan-13

Jan-12

Jan-09

0
Jan-08

Corp/Sembcorp Marines total orders since 2010. While both

companies are sitting on close to record-high backlogs, they
appear vulnerable to lower-than-average new orders through
2015. We cut our price targets on Keppel Corp to SGD 10.20
(from SGD 10.90) and on Sembcorp Marine to SGD 3.80 (from
SGD 4.20). These changes reflect a cut of up to 15% in 201416E new orders and the use of a lower forward PE target of 0.5 SD (previously used the five-year mean).

50,000

Jan-07

Jack-up rigs have accounted for 62%/47% of Keppel

Jan-11

Global rig orders of USD 3.4bn in 2Q14 were 43% lower than
the average of the preceding nine quarters. Lacklustre demand
for floaters mainly accounted for the decline. While jack-up rig
orders have remained healthy YTD, we expect new build

Jan-10

Global rig orders were weak in 2Q14

Source: Rigzone, Standard Chartered Research estimates

Did you knowThe worlds largest jack-up rig was

delivered this year by Keppel Corp to a European
client; the rigs cost was USD 650mn, or three times
more than a standard jack-up rig.

Important disclosures can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2014

http://research.standardchartered.com

Equity Research l Subsea to Shore

Offshore rig market

Challenging combination of slowing demand and rising supply
Figure 1 shows some correlation between global upstream expenditure and rig
orders. We believe orders for offshore drilling rigs may fall 28% YoY to USD 18.6bn
in 2014, as growth in upstream spending slows significantly. We expect up to 230
new offshore drilling rig deliveries during 2013-15, 45% more than in the preceding
three-year period.
Figure 1: Global upstream spending linked to rig orders

Figure 2: Rig deliveries rising

2014 rig orders may decline 28% on falling upstream spending

Rig deliveries in 2013-15 likely to be 45% more than in

2010-12

Rig orders (L)

Global upstream spend YoY (R)

36

25%

5%

Rigs

USD bn

50

10%

18

6
0
2008

2009

2010

2011

2012

2013

-5%

20

-10%

10

-15%

0
2007

2014E

Source: Wood Mackenzie, Standard Chartered Research

40
30

0%

12

Jack-up

60

15%
24

Semisub

70

20%

30

Drillships

80

2008

2009

2010

2011

2012

2013 2014E 2015E

Source: IHS, Standard Chartered Research

Jack-up day rates to face more pressure in 2015 as supply of new rigs rises
Day rates for deepwater rigs have come under pressure since the start of 2014 and
may have fallen up to 20% so far. Jack-up rig day rates, which have risen in the past
three years and held up well YTD, may see increasing downward pressure from 2015
as deliveries of new rigs are expected to rise c.50% YoY. We believe a 10-15%
decline in rates from the recent peak is a realistic scenario. The number of rigs retired
or converted to other uses and higher-than-forecast demand should be mitigating
factors. Our data points to approximately 250 jack-up rigs that are technically
obsolete i.e. 30 years or older. This represents about half the global jack-up rig fleet.
Figure 3: Deepwater day rates (USD 000)

Figure 4: Jack-up day rates and jack-up orders

Deepwater rates may have fallen up to 20% this year

Orders for new jack-ups have risen in the past three years
200,000

600

Day rate (L)

Jack-up orders [R]

70
60

500
150,000

50

USD

40
400

30
100,000

300

20
10

200
1H13

2014E

Source: IHS, Drilling companies and Standard Chartered Research

6 August 2014

50,000
0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Source: IHS, Drilling companies and Standard Chartered Research

Equity Research l Subsea to Shore

Singapore yards appear more vulnerable to jack-up market slowdown

Jack-up rig orders accounted for 62% and 47% of Keppel Corps and Sembcorp
Marines total orders, respectively, during 2011-1H14. We believe Keppel Corp and
Sembcorp Marine are more vulnerable to a slowdown as they have cumulatively
accounted for 55% of global jack-up orders by value since 2011.
Figure 5: Average share of jack-up rig construction

Figure 6: Share of jack-up rig construction (time series)

Singapore yards still in the lead (2011-1H14)

Global market share by units

100%

100%

9%

15%

90%

90%

80%

80%
36%

70%

70%

40%

60%
50%
40%

M.East/others

60%

China

50%

Singapore

30%

55%

45%

20%

Others
Middle East

40%

China

30%

Singapore

20%

10%

10%

0%

0%
Units

Value

2011

Source: Companies, Standard Chartered Research

2012

2013

1H14

Average

Source: IHS, Standard Chartered Research

Singapore shipyards have a higher market share by value because of their

focus on the high-end segment
Singapore shipyards have been responsible for 55% and 45% of global jack-up rig
orders by value and by units, respectively, since 2011. The Singapore shipyards
have a higher proportion of the jack-up market by value compared with the share of
units, given their leading position in high-end rigs. Chinese shipyards have seen their
market share for jack-up rig construction rise to c.40% (by units) in recent years. By
value, Chinese shipyards have accounted for an estimated 36% of total jack-up
orders since 2011.
Figure 7: Keppel Corps 2010-1H14 orders

Figure 8: Sembcorp Marines 2010-1H14 orders

62% of cumulative orders from jack-up rigs (ex-Sete)

47% of cumulative orders from jack-up rigs (ex-Sete)

6%

11%
Jackup

19%

9%

Jackup
28%

Semisubmersible
62%

47%

Production Unit

Semisubmersible
Drillship
FPU

Others

Conversion/others

8%
12%

Source: Company (ex-Sete Brazil orders)

6 August 2014

Source: Company (ex-Sete Brazil orders)

Equity Research l Subsea to Shore

What is actionable?
We believe the challenges facing Singapore rig builders will rise in the next 12
months, as the jack-up rig segment faces a potential excess supply scenario. We
would trim exposure to rig builders in favour of companies such as VARD Holdings
and Ezion Holdings in niche areas.
Figure 9: Valuation table

China Oilfield Services

Ezion Holdings
Ezra Holdings
Hilong Holding
Keppel Corp
Sembcorp Marine
UMW Oil & Gas
VARD Holdings

hide column-old rating

Price
Ticker
(lc)
2883 HK
19.24
EZI SP
2.15
EZRA SP
1.15
1623 HK
4.40
KEP SP
10.89
SMM SP
4.03
UMWOG MK
4.01
VARD SP
1.08

Rec
OP
OP
IL
OP
IL
IL
IL
OP

PT (lc)
New
Chg (%)
22.00
2.70
1.05
5.80
10.20
(6.4)
3.80
(9.5)
3.80
1.15
-

Up/(Dn)
side (%)
14.3
25.6
(8.7)
31.8
(6.3)
(5.7)
(5.2)
6.5

PER (x)
FY1E FY2E
10.1
8.5
11.0
8.7
21.4
11.2
11.9
9.9
12.7
11.7
14.6
14.3
31.3
18.3
12.5
9.0

EV/EBITDA (x)
FY1E
FY2E
7.4
6.2
10.5
7.5
13.0
9.2
8.1
6.4
10.7
10.6
9.4
8.8
23.3
14.6
6.3
4.2

Div yield (%)

FY1E
FY2E
3.0
3.6
0.0
0.0
0.0
0.4
2.5
3.0
3.8
4.1
3.4
3.5
0.2
0.3
2.4
3.3

Prices as of 5 August 2014.

Source: FactSet, Standard Chartered Research

Changes to our valuations for rig builders

Lowering our PE target to -0.5 SD
For valuing the offshore and marine (O&M) business, we now use a forward PE
target of 0.5 SD below the five-year mean compared with the average forward PE
previously. We attribute this to our expectation of a decline in new orders for jack-up
rigs beginning in 2H14, as the industry is likely to face an excess supply situation. We
apply this PE target to the average of the three-year forward EPS to arrive at our
price target.
Strong order backlog provides some downside protection
We believe a PE target of -0.5 SD is reasonable, given rising headwinds for the
industry. We factor in some downside protection arising from Keppel Corp and
Sembcorp Marines strong order backlog. Both companies have accumulated close
to record-high orders that will provide a healthy base load of work through 2015.
The following table illustrates our bull-base-bear scenarios.
Figure 10: Fair values and scenarios

Figure 11: Sembcorp Marine forward PE

Our price target uses -0.5 SD of the five-year mean

The five-year average forward PE is 15.3x

Bear

Base

Bull

25.0

Keppel Corp

8.8

10.2

11.8

23.0

Sembcorp Marine

3.1

3.8

4.5

21.0

Fair value SGD

+2 SD
+SD

O&M assumptions

Bear

Base

Bull

Keppel Corp
2014-16 orders (SGD bn/p.a.)
Forward PE target

Forward PE target
Source: Standard Chartered Research

6 August 2014

17.0
Mean

15.0

4.6

5.1

5.6

13.0

11.0

13.1

15.3

11.0

3.4

3.8

4.1

11.0

13.1

15.3

Sembcorp Marine
2014-16 orders (SGD bn/p.a.)

PER

19.0

-1 SD

9.0
7.0
Sep-09

-2 SD
Sep-10

Sep-11

Sep-12

Sep-13

Source: FactSet, Standard Chartered Research

Equity Research l Subsea to Shore

New orders and backlog peaked in 2012-13

We model a decline in new orders through 2015 for Keppel Corp and Sembcorp
Marine. New orders peaked in 2012, while the orders backlog hit a high in 2012-13.
Our new orders assumption implies an average 2014-16 book-to-bill ratio of 0.7x for
both Keppel Corp and Sembcorp Marine. This is less than the 2011-13 book-to-bill of
1.6x and 1.5x, respectively.
Figure 12: Order backlog

Figure 13: New orders

Backlog was at or near record-highs at end-2013

Orders peaked in 2012 and are expected to fall through 2015

Keppel Corp

16

12

Sembcorp Marine

14

Keppel Corp

Sembcorp Marine

10
8

10
SGDbn

SGDbn

12

8
6

6
4

4
2

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Companies

6 August 2014

05

06

07

08

09

10

11

12

13 14E 15E 16E

Source: Companies, Standard Chartered Research

Equity Research l Subsea to Shore

Keppel Corp
Positive developments unlikely to offset jack-up weakness
Development of new products and partnerships are unlikely
to offset weaker jack-up rig orders.

IN-LINE

PRICE as of 5 Aug 2014

PRICE TARGET

Our new PT of SGD 10.20 (from SGD 10.90) is 18% below

the street (PE target of 0.5 SD below the five-year mean).

SGD 10.89

SGD 10.20

We cut our 2014E-16E new orders forecast by 5-10%,

implying an average book-to-bill of 0.7 (1.6x in 2011-13).
Assumptions for our bear-bull fair values of SGD 8.8-11.8
are tabled in the main section of this report (Figure 10.)

Development of new products and partnerships unlikely to

offset weaker jack-up rig orders. We appreciate Keppel Corps
expansion into new product areas such as FLNG conversion, a
drillship focused on development drilling and its proposed shipyard
joint venture with PEMEX. However, these developments are
unlikely to offset a slowdown in jack-up rig orders, which typically
account for c.60% of total orders. We cut our 2014E-16E new
orders forecast by 5-10%, translating to an average book-to-bill
ratio of 0.7x (1.6x in the preceding three-year period).
Revised SOTP valuation driven by reduced new orders
forecast and lower target PE. Our revised SOTP price target of
SGD 10.20 (from SGD 10.90) is based on 0.5 SD below the fiveyear average forward PE for the O&M business. We previously
pegged it to the five-year average forward PE. Assumptions for
our bear-bull fair values of SGD 8.8-11.8 are tabled in the main
section of this report (Figure 10).

Bloomberg code

O&M business still in the drivers seat. We model the O&M

business as the main earnings driver behind the 14% rise in the
companys operating profit during 2013-16E. We forecast O&M
revenue of SGD 7.1-10.1bn during 2013-16 with O&M operating
margin remaining relatively stable at 14.3%. 1H14 backlog of SGD
14.1bn is just shy of the record high SGD 14.4bn in 1Q14.

Wai Mun Leong, CFA

Akash Gupta

+65 6596 8509

Equity Research
Standard Chartered Bank, Singapore Branch

+65 6596 8513

Equity Research
Standard Chartered Bank, Singapore Branch

6 August 2014
KEP SP
SGD 10.89
SGD 10.20

Reuters code

KEP SP

KPLM.SI

Market cap

12-month range

SGD 19,417mn (USD 15,550mn)

SGD 10.01 - 11.38

EPS adj. est. change 2014E

Year-end: December
Sales (SGD mn)
EBITDA (SGD mn)
EBIT (SGD mn)
Pre-tax profit (SGD mn)
Net profit adj. (SGD mn)
FCF (SGD mn)
EPS adj. (SGD)
DPS (SGD)
Book value/share (SGD)
EPS growth adj. (%)
DPS growth (%)
EBITDA margin (%)
EBIT margin (%)
Net margin adj. (%)
Div. payout (%)
Net gearing (%)
ROE (%)
ROCE (%)
EV/sales (x)
EV/EBITDA (x)
PBR (x)
PER adj. (x)
Dividend yield (%)

-2.5%

2013
12,380
2,399
2,134
2,794
1,349
(309)
0.75
0.50
5.37
-31.1
-31.6
19.4
17.2
10.9
49.3
11.2
19.5
10.5
1.8
9.2
2.1
14.3
4.6

2015E

2014E
12,608
2,034
1,737
2,279
1,537
827
0.86
0.41
5.88
13.6
-16.9
16.1
13.8
12.2
49.2
11.2
15.1
8.1
1.7
10.7
1.9
12.7
3.8

-1.9%

2015E
14,723
1,975
1,975
2,397
1,679
1,486
0.93
0.45
6.28
8.9
8.9
13.4
13.4
11.4
49.1
5.8
15.2
8.8
1.4
10.6
1.7
11.7
4.1

2016E
15,655
2,092
2,094
2,503
1,729
1,108
0.96
0.46
6.75
2.7
2.7
13.4
13.4
11.0
48.9
2.9
14.6
9.1
1.3
9.8
1.6
11.4
4.2

Source: Company, Standard Chartered Research estimates

Share price performance

Keppel Corp

O&M business accounts for 69% of SOTP valuation. The O&M

business accounts for the majority of SOTP valuation at 69%,
followed by real estate (Keppel Land, KPLD SP, IL, PT SGD 3.72)
at 15%. Infrastructure (valued at 5x EV/EBITDA) and other
businesses (listed entities at market value) account for 9%, while
net adjustments to working capital items make up the remainder.

(unchanged)

STRAITS TIMES INDEX (rebased)

11.6
10.5
9.4
Aug-13

Nov-13

Share price (%)

Ordinary shares
Relative to index
Relative to sector
Major shareholder
Free float
Average turnover (USD)

Feb-14

May-14

Aug-14

-1 mth
-3 mth -12 mth
1
3
6
-1
1
3
Temasek Holdings (21.0%)
79%
25,087,794

Source: Company, FactSet

Equity Research l Subsea to Shore

Income statement (SGD mn)

Year-end: Dec
Sales
Gross profit
SG&A
Other income
Other expenses
EBIT
Net interest
Associates
Other non-operational
Exceptional items
Pre-tax profit
Taxation
Minority interests
Exceptional items after tax
Net profit

Cash flow statement (SGD mn)

2012
13,965
0
12
0
0
2,621
33
603
0
0
3,256
(501)
(518)
0
2,237

2013
12,380
0
268
0
0
2,134
33
626
0
0
2,794
(397)
(551)
0
1,846

2014E
12,608
0
0
0
0
1,737
(13)
555
0
0
2,279
(408)
(334)
0
1,537

2015E
14,723
0
0
0
0
1,975
(39)
462
0
0
2,397
(402)
(317)
0
1,679

2016E
15,655
0
0
0
0
2,094
(53)
462
0
0
2,503
(426)
(348)
0
1,729

Net profit adj.

EBITDA

1,950
2,861

1,349
2,399

1,537
2,034

1,679
1,975

1,729
2,092

EPS (SGD)
EPS adj. (SGD)
DPS (SGD)
Avg fully diluted shares (mn)

1.25
1.09
0.72
1,783

1.00
0.75
0.50
1,788

0.84
0.86
0.41
1,794

0.91
0.93
0.45
1,799

0.94
0.96
0.46
1,804

Year-end: Dec
Cash
Short-term investments
Accounts receivable
Inventory
Other current assets
Total current assets

2012
4,055
417
1,995
7,443
697
14,607

2013
5,565
445
1,916
8,995
1,037
17,957

2014E
5,331
445
1,969
8,995
1,036
17,776

2015E
5,574
445
2,340
8,995
1,210
18,564

2016E
5,501
445
2,531
8,995
1,287
18,758

PP&E
Intangible assets
Associates and JVs
Other long-term assets
Total long-term assets

3,337
0
5,267
5,960
14,564

3,798
0
5,482
2,818
12,098

4,592
0
6,313
2,818
13,723

5,111
0
7,051
2,818
14,980

5,604
0
7,789
2,818
16,211

Total assets

29,170

30,056

31,499

33,543

34,969

Short-term debt
Accounts payable
Other current liabilities
Total current liabilities

1,006
5,536
2,523
9,064

517
5,409
3,416
9,342

517
5,509
3,466
9,492

517
6,433
3,930
10,879

517
6,840
4,134
11,491

Long-term debt
Convertible bonds
Deferred tax
Other long-term liabilities
Total long-term liabilities

6,202
0
0
326
6,528

6,583
0
0
442
7,025

6,500
0
0
442
6,942

6,000
0
0
442
6,442

5,500
0
0
442
5,942

15,592

16,367

16,433

17,321

17,433

9,246
4,332

9,701
3,988

10,669
4,396

11,424
4,798

12,312
5,224

Total equity

13,578

13,689

15,065

16,222

17,536

Total liabilities and equity

29,171

30,056

31,499

33,543

34,969

3,153
1,783

1,535
1,808

1,686
1,813

943
1,819

516
1,824

Balance sheet (SGD mn)

Total liabilities
Shareholders funds
Minority interests

Net debt (cash)

Year-end shares (mn)

Year-end: Dec
EBIT
Depreciation & amortisation
Net interest
Tax paid
Changes in working capital
Others
Cash flow from operations

2012
2,621
240
(225)
(1,449)
(152)
1,036

2013
2,134
265
(585)
(754)
(434)
627

2014E
1,737
297
(464)
97
0
1,667

2015E
1,975
0
(477)
843
0
2,341

2016E
2,094
(2)
(469)
344
0
1,967

Capex
Acquisitions & Investments
Disposals
Others
Cash flow from investing

(836)
(426)
35
157
(1,070)

(936)
(543)
534
267
(678)

(840)
(543)
50
267
(1,066)

(855)
(543)
50
267
(1,081)

(859)
(543)
50
267
(1,085)

Dividends
Issue of shares
Change in debt
Other financing cash flow
Cash flow from financing

(1,001)
(52)
2,331
0
1,277

(843)
241
2,130
0
1,528

(752)
0
(83)
0
(835)

(845)
0
(500)
0
(1,345)

(815)
0
(500)
0
(1,315)

1,244
0
200

1,477
0
(309)

(233)
0
827

(85)
0
1,486

(433)
0
1,108

2012

2013

2014E

2015E

2016E

0.0
20.5
18.8
14.0
15.4
38.5
15.0
4.4
22.2
68.4

0.0
19.4
17.2
10.9
14.2
-11.3
-17.5
-20.0
-31.1
-31.6

0.0
16.1
13.8
12.2
17.9
1.8
-16.7
-16.7
13.6
-16.9

0.0
13.4
13.4
11.4
16.7
16.8
9.2
9.2
8.9
8.9

0.0
13.4
13.4
11.0
17.0
6.3
3.0
3.0
2.7
2.7

Efficiency ratios
ROE (%)
ROCE (%)
Asset turnover (x)
Op. cash/EBIT (x)
Depreciation/capex (x)
Inventory days
Accounts receivable days
Accounts payable days

26.9
14.6
0.5
0.4
0.3
nm
52.6
nm

19.5
10.5
0.4
0.3
0.3
nm
57.6
nm

15.1
8.1
0.4
1.0
0.4
nm
56.2
nm

15.2
8.8
0.5
1.2
0.0
nm
53.4
nm

14.6
9.1
0.5
0.9
0.0
nm
56.8
nm

Leverage ratios
Net gearing (%)
Debt/capital (%)
Interest cover (x)
Debt/EBITDA (x)
Current ratio (x)

23.2
35.8
nm
2.1
1.6

11.2
34.3
nm
3.0
1.9

11.2
31.9
nm
3.5
1.9

5.8
28.8
nm
3.4
1.7

2.9
25.6
nm
3.0
1.6

Valuation
EV/sales (x)
EV/EBITDA (x)
EV/EBIT (x)
PER (x)
PER adj. (x)
PBR (x)
Dividend yield (%)

1.5
7.4
8.0
8.3
9.5
2.0
6.9

1.8
9.2
10.4
10.7
14.3
2.1
4.6

1.7
10.7
12.5
13.0
12.7
1.9
3.8

1.4
10.6
10.6
11.9
11.7
1.7
4.1

1.3
9.8
9.8
11.6
11.4
1.6
4.2

Change in cash
Exchange rate effect
Free cash flow

Financial ratios and other

Year-end: Dec
Operating ratios
Gross margin (%)
EBITDA margin (%)
EBIT margin (%)
Net margin adj. (%)
Effective tax rate (%)
Sales growth (%)
Net income growth (%)
EPS growth (%)
EPS growth adj. (%)
DPS growth (%)

Source: Company, Standard Chartered Research estimates

6 August 2014

Equity Research l Subsea to Shore

Sembcorp Marine
Good execution, but jack-up market faces wall of supply
We expect challenges for the jack-up market as deliveries IN-LINE (unchanged)
see a sharp rise through 2015; Sembcorp Marines orders
PRICE as of 5 Aug 2014
may slow, as jack-ups have accounted for 47% of new
SGD 4.03
business since 2011.
Our new PT of SGD 3.80 (from SGD 4.20) is driven by our
reduced new orders forecast, a lower target PE and a
2.2%/6.7% cut in 2014/15E EPS. Our PT is 12% below the
street.

Bloomberg code

Management recently alluded to on-track progress for both

the new yard in Brazil and the first drillship for Sete Brazil.

EPS adj. est. change 2014E

PRICE TARGET

SGD 3.80
Reuters code

SMM SP

SCMN.SI

Market cap

12-month range

SGD 8,434mn (USD 6,754mn)

SGD 3.90 - 4.63

-2.2%

2015E

-6.7%

Management was most optimistic on the outlook for

production-related platforms and vessels.
Jack-up market headwinds loom. We welcome Sembcorp
Marines capacity expansion in repair and conversion activities,
which are higher margin, through the new yard in Tuas
(Singapore). We also favour its product expansion into drillships.
However, we believe the company will face industry headwinds in
slower jack-up rig orders over the next 12-24 months. Jack-up rigs
have accounted for 47% of total orders (ex-Sete) since 2011.
More conservative assumptions. We cut our 2014-16 new
orders forecast by 10-15%, which translates to an average bookto-bill ratio of 0.7x (1.5x in 2011-13). Our 2014E/15E EPS is
1.8%/7.5% below the street. Our revised SOTP price target of
SGD 3.80 (from SGD 4.20) is based on 0.5 SD below the five-year
average forward PE (previously used the mean). Our new price
target translates to a 2015 EV/EBITDA and PBR of 8.4x and 2.2x,
respectively. Assumptions for our bear-bull fair values of SGD 3.04.5 are tabled in the main section of this report (Figure 10).

Year-end: December
Sales (SGD mn)
EBITDA (SGD mn)
EBIT (SGD mn)
Pre-tax profit (SGD mn)
Net profit adj. (SGD mn)
FCF (SGD mn)
EPS adj. (SGD)
DPS (SGD)
Book value/share (SGD)
EPS growth adj. (%)
DPS growth (%)
EBITDA margin (%)
EBIT margin (%)
Net margin adj. (%)
Div. payout (%)
Net gearing (%)
ROE (%)
ROCE (%)
EV/sales (x)
EV/EBITDA (x)
PBR (x)
PER adj. (x)
Dividend yield (%)

YoY. Management alluded to on-track progress for the new yard in

Brazil and the first drillship for Sete Brazil, in its 1H14 briefing. For
new orders, management appears to be more optimistic on fixed
production platforms and FPSO conversions.

Wai Mun Leong, CFA

Akash Gupta

+65 6596 8509

Equity Research
Standard Chartered Bank, Singapore Branch

+65 6596 8513

Equity Research
Standard Chartered Bank, Singapore Branch

6 August 2014
SMM SP
SGD 4.03
SGD 3.80

2014E
6,246
819
681
707
576
913
0.28
0.14
1.51
16.7
6.0
13.1
10.9
9.2
50.0
-23.7
20.3
17.4
1.2
9.4
2.7
14.6
3.4

2015E
6,392
866
697
729
590
1,174
0.28
0.14
1.68
2.3
2.3
13.6
10.9
9.2
50.0
-22.0
18.7
16.6
1.2
8.8
2.4
14.3
3.5

2016E
6,585
933
736
779
623
1,297
0.30
0.15
1.86
5.4
5.4
14.2
11.2
9.5
50.0
-21.6
17.9
16.6
1.2
8.2
2.2
13.6
3.7

Source: Company, Standard Chartered Research estimates

Share price performance

Sembcorp Marine

Optimistic on production-related platforms and vessels. We

model a 19% rise in revenue during 2013-16E, driven by a
significant backlog of SGD 12.6bn. We expect operating margin to
remain stable at c.11% during this period. 1H14 earnings met our
and street expectations with operating margin of 11.3% and net
profit accounting for 44% of our full-year forecast (similar to last
year). Headline net profit grew 4%, while adjusted profit rose 16%

2013
5,526
745
644
665
493
945
0.24
0.13
1.34
0.9
0.0
13.5
11.7
8.9
55.1
-33.1
21.7
19.0
1.5
11.1
3.3
18.9
2.9

STRAITS TIMES INDEX (rebased)

4.7
4.3
3.9
Aug-13

Nov-13

Share price (%)

Ordinary shares
Relative to index
Relative to sector
Major shareholder
Free float
Average turnover (USD)

Feb-14

May-14

Aug-14

-1 mth
-3 mth -12 mth
0
2
-9
-1
-1
-11
Sembcorp industries (63.0%)
39%
7,816,406

Source: Company, FactSet

Equity Research l Subsea to Shore

Income statement (SGD mn)

Year-end: Dec
Sales
Gross profit
SG&A
Other income
Other expenses
EBIT
Net interest
Associates
Other non-operational
Exceptional items
Pre-tax profit
Taxation
Minority interests
Exceptional items after tax
Net profit

Cash flow statement (SGD mn)

2012
4,430
695
(149)
34
(25)
554
18
56
1
0
630
0
0
50
538

2013
5,526
708
(148)
87
(2)
644
0
16
5
0
665
0
0
63
556

2014E
6,246
792
(147)
40
(5)
681
(7)
29
5
0
707
0
0
0
576

2015E
6,392
809
(147)
40
(5)
697
(13)
40
5
0
729
0
0
0
590

2016E
6,585
852
(151)
40
(5)
736
(9)
47
5
0
779
0
0
0
623

488
648

493
745

576
819

590
866

623
933

0.23
0.23
0.13
2,088

0.24
0.24
0.13
2,090

0.28
0.28
0.14
2,093

0.28
0.28
0.14
2,096

0.30
0.30
0.15
2,099

Year-end: Dec
Cash
Short-term investments
Accounts receivable
Inventory
Other current assets
Total current assets

2012
1,409
0
468
1,731
33
3,641

2013
1,695
0
442
2,084
0
4,221

2014E
1,519
0
500
2,344
0
4,363

2015E
1,440
0
512
2,329
0
4,281

2016E
1,310
0
527
2,399
0
4,236

PP&E
Intangible assets
Associates and JVs
Other long-term assets
Total long-term assets

1,476
0
417
252
2,145

2,394
0
446
189
3,029

3,002
0
473
189
3,664

3,362
0
512
189
4,064

3,645
0
558
189
4,392

Total assets

5,786

7,250

8,028

8,344

8,628

Short-term debt
Accounts payable
Other current liabilities
Total current liabilities

33
1,687
998
2,718

166
1,781
1,583
3,530

166
2,013
1,764
3,943

166
2,060
1,785
4,011

166
2,122
1,821
4,109

300
0
221
0
521

600
0
311
0
911

600
0
311
0
911

500
0
311
0
811

300
0
311
0
611

Total liabilities

3,239

4,441

4,853

4,821

4,720

Shareholders funds
Minority interests

2,438
109

2,677
133

3,003
172

3,311
212

3,654
255

Total equity

2,546

2,809

3,174

3,523

3,909

Total liabilities and equity

5,786

7,250

8,028

8,344

8,628

(1,076)
2,088

(929)
2,090

(753)
2,093

(774)
2,096

(844)
2,099

Net profit adj.

EBITDA
EPS (SGD)
EPS adj. (SGD)
DPS (SGD)
Avg fully diluted shares (mn)

Balance sheet (SGD mn)

Long-term debt
Convertible bonds
Deferred tax
Other long-term liabilities
Total long-term liabilities

Net debt (cash)

Year-end shares (mn)

Year-end: Dec
EBIT
Depreciation & amortisation
Net interest
Tax paid
Changes in working capital
Others
Cash flow from operations

2012
554
94
23
(90)
275
13
868

2013
644
101
(0)
(54)
991
60
1,742

2014E
681
138
(7)
(77)
913
5
1,653

2015E
697
170
(13)
(92)
938
5
1,704

2016E
736
198
(9)
(98)
946
5
1,777

Capex
Acquisitions & Investments
Disposals
Others
Cash flow from investing

(516)
(12)
1
1
(527)

(797)
(7)
6
1
(797)

(740)
0
0
1
(739)

(530)
0
0
1
(529)

(480)
0
0
1
(479)

Dividends
Issue of shares
Change in debt
Other financing cash flow
Cash flow from financing

(529)
(3)
300
0
(232)

(283)
(19)
438
0
136

(272)
1
0
0
(271)

(288)
1
(100)
0
(388)

(295)
1
(200)
0
(495)

110
0
352

1,080
0
945

643
0
913

788
0
1,174

804
0
1,297

2012

2013

2014E

2015E

2016E

15.7
14.6
12.5
11.0
0.0
11.9
-28.4
-30.7
-30.7
-48.0

12.8
13.5
11.7
8.9
0.0
24.7
3.2
0.9
0.9
0.0

12.7
13.1
10.9
9.2
0.0
13.0
3.7
16.7
16.7
6.0

12.7
13.6
10.9
9.2
0.0
2.3
2.4
2.3
2.3
2.3

12.9
14.2
11.2
9.5
0.0
3.0
5.6
5.4
5.4
5.4

22.2
19.4
0.8
1.6
0.2
nm
39.1
nm

21.7
19.0
0.8
2.7
0.1
nm
30.1
nm

20.3
17.4
0.8
2.4
0.2
nm
27.5
nm

18.7
16.6
0.8
2.4
0.3
nm
28.9
nm

17.9
16.6
0.8
2.4
0.4
nm
28.8
nm

Leverage ratios
Net gearing (%)
Debt/capital (%)
Interest cover (x)
Debt/EBITDA (x)
Current ratio (x)

-42.3
10.9
168.0
0.3
1.3

-33.1
20.6
79.8
0.8
1.2

-23.7
18.8
44.4
0.9
1.1

-22.0
15.4
32.4
0.8
1.1

-21.6
10.3
43.3
0.6
1.0

Valuation
EV/sales (x)
EV/EBITDA (x)
EV/EBIT (x)
PER (x)
PER adj. (x)
PBR (x)
Dividend yield (%)

1.9
13.2
15.5
20.7
20.7
3.8
2.7

1.5
11.1
12.9
18.9
18.9
3.3
2.9

1.2
9.4
11.3
14.6
14.6
2.7
3.4

1.2
8.8
11.0
14.3
14.3
2.4
3.5

1.2
8.2
10.3
13.6
13.6
2.2
3.7

Change in cash
Exchange rate effect
Free cash flow

Financial ratios and other

Year-end: Dec
Operating ratios
Gross margin (%)
EBITDA margin (%)
EBIT margin (%)
Net margin adj. (%)
Effective tax rate (%)
Sales growth (%)
Net income growth (%)
EPS growth (%)
EPS growth adj. (%)
DPS growth (%)
Efficiency ratios
ROE (%)
ROCE (%)
Asset turnover (x)
Op. cash/EBIT (x)
Depreciation/capex (x)
Inventory days
Accounts receivable days
Accounts payable days

Source: Company, Standard Chartered Research estimates

6 August 2014

Equity Research l Subsea to Shore

Disclosures appendix
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard
Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, SCB)
and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES.
Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and
attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other
subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views
contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
Where disclosure date appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the
date of the report, unless otherwise stated.
Recommendation Distribution and Investment Banking Relationships
% of covered companies
currently assigned this rating

% of companies assigned this rating with which SCB has provided

investment banking services over the past 12 months

OUTPERFORM

55.8%

10.4%

IN-LINE

33.0%

10.1%

UNDERPERFORM
As of 30 June 2014

11.2%

8.1%

Research Recommendation
Terminology
OUTPERFORM (OP)
IN-LINE (IL)
UNDERPERFORM (UP)

Definitions
The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months
The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next
12 months
The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months

SCB uses an investment horizon of 12 months for its price targets.

Additional information, including disclosures, with respect to any securities referred to herein will be available upon request. Requests should be sent to
scer@sc.com.
Global Disclaimer: Standard Chartered Bank and/or its affiliates ("SCB) makes no representation or warranty of any kind, express, implied or statutory regarding
this document or any information contained or referred to in the document. The information in this document is provided for information purposes only. It does not
constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it
constitute any prediction of likely future movements in rates or prices or represent that any such future movements will not exceed those shown in any illustration.
The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price.
While reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. The
contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of
any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding the
appropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statements
regarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections, and price target(s), if any, contained in
this document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The value
and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested.
Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject to
fluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Past
performance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavour to update
on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so.
Accordingly, information may be available to us which is not reflected in this material, and we may have acted upon or used the information prior to or immediately
following its publication. SCB is not a legal or tax adviser, and is not purporting to provide legal or tax advice. Independent legal and/or tax advice should be sought
for any queries relating to the legal or tax implications of any investment. SCB and/or its affiliates may have a position in any of the securities, instruments or
currencies mentioned in this document. SCB and/or its affiliates or its respective officers, directors, employee benefit programmes or employees, including persons
involved in the preparation or issuance of this document may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities
or financial instruments referred to in this document and on the SCB Research website or have a material interest in any such securities or related investments, or
may be the only market maker in relation to such investments, or provide, or have provided advice, investment banking or other services, to issuers of such
investments. SCB has in place policies and procedures and physical information walls between its Research Department and differing public and private business
functions to help ensure confidential information, including inside information is not disclosed unless in line with its policies and procedures and the rules of its
regulators. Data, opinions and other information appearing herein may have been obtained from public sources. SCB makes no representation or warranty as to the
accuracy or completeness of such information obtained from public sources. SCB also makes no representation or warranty as to the accuracy nor responsible for
any information or data contains on any third partys website. You are advised to make your own independent judgment (with the advice of your professional advisers
as necessary) with respect to any matter contained herein and not rely on this document as the basis for making any trading, hedging or investment decision. SCB
accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental, consequential, punitive or exemplary
damages) from the use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error,
imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or
any contents or associated services. This material is for the use of intended recipients only and in any jurisdiction in which distribution to private/retail customers
would require registration or licensing of the distributor which the distributor does not currently have, this document is intended solely for distribution to professional
and institutional investors.
Country-Specific Disclosures - If you are receiving this document in any of the countries listed below, please note the following:
United Kingdom and European Economic Area: SCB is authorised in the United Kingdom by the Prudential Regulation Authority and regulated by the Financial
Conduct Authority and the Prudential Regulation Authority. This communication is not directed at Retail Clients in the European Economic Area as defined by
Directive 2004/39/EC. Nothing in this document constitutes a personal recommendation or investment advice as defined by Directive 2004/39/EC. Australia: The
Australian Financial Services Licence for Standard Chartered Bank is Licence No: 246833 with the following Australian Registered Business Number (ARBN:
097571778). Australian investors should note that this communication was prepared for wholesale clients only and is not directed at persons who are retail clients
as those terms are defined in sections 761G and 761GA of the Corporations Act 2001 (Cth). Bangladesh: This research has not been produced in Bangladesh. The
report has been prepared by the research analyst(s) in an autonomous and independent way, including in relation to SCB. THE SECURITIES MENTIONED IN THIS
REPORT HAVE NOT BEEN AND WILL NOT BE REGISTERED IN BANGLADESH AND MAY NOT BE OFFERED OR SOLD IN BANGLADESH WITHOUT PRIO R
APPROVAL OF THE REGULATORY AUTHORITIES IN BANGLADESH. Botswana: This document is being distributed in Botswana by, and is attributable to,
Standard Chartered Bank Botswana Limited which is a financial institution licensed under the Section 6 of the Banking Act CAP 46.04 and is listed in the Botswana
Stock Exchange. Brazil: SCB disclosures pursuant to the Securities and Exchange Commission of Brazil (CVM) Instruction 483/10: This research has not been
6 August 2014

10

Equity Research l Subsea to Shore

produced in Brazil. The report has been prepared by the research analyst(s) in an autonomous and independent way, including in relation to SCB. THE
SECURITIES MENTIONED IN THIS DOCUMENT HAVE NOT BEEN AND WILL NOT BE REGISTERED PURSUANT TO THE REQUIREMENTS OF THE
SECURITIES AND EXCHANGE COMMISSION OF BRAZIL AND MAY NOT BE OFFERED OR SOLD IN BRAZIL EXCEPT PURSUANT TO AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS AND IN COMPLIANCE WITH THE SECURITIES LAWS OF BRAZIL. Germany: In Germany, this
document is being distributed by Standard Chartered Bank Germany Branch which is also regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin).
Hong Kong: This document, except for any portion advising on or facilitating any decision on futures contracts trading, is being distributed in Hong Kong by, and is
attributable to, Standard Chartered Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority. India: This
document is being distributed in India by Standard Chartered Securities (India) Limited, which is a SEBI-registered broker and a member of the Bombay Stock
Exchange Limited and The National Stock Exchange of India Limited. Registered Address: 2nd Floor, 23-25 M. G. Road, Fort, Mumbai - 400 001. India | Telephone
No: 022 - 6135 5999 | Fax No: 022 - 6135 5900| http://www.standardcharteredtrade.co.in | Email: mitesh.thakkar1@sc.com. | CIN: U65990MH1994PLC079263.
Indonesia: The information in this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to any person
to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or
represent that any such future movements will not exceed those shown in any illustration. Kenya: Standard Chartered Bank Kenya Limited is regulated by the
Central Bank of Kenya. This document is intended for use only by Professional Clients and should not be relied upon by or be distributed to Retail Clients. Korea:
This document is being distributed in Korea by, and is attributable to, Standard Chartered Securities Korea Limited which is regulated by the Financial Supervisory
Service. Macau: This document is being distributed in Macau Special Administrative Region of the Peoples' Republic of China, and is attributable to, Standard
Chartered Bank (Macau Branch) which is regulated by Macau Monetary Authority. New Zealand: New Zealand Investors should note that this document was
prepared for "wholesale clients" only within the meaning of section 5C of the Financial Advisers Act 2008. This document is not directed at persons who are retail
clients as defined in the Financial Advisers Act 2008. This document does not form part of any offer to the public in New Zealand. Philippines: This document may
be distributed in the Philippines by, and is attributable to, Standard Chartered Bank (Philippines) which is regulated by the Bangko Sentral ng Pilipinas. This
document is for information purposes only and does not offer, sell, offer to sell or distribute securities in the Philippines that are not registered with the Securities and
Exchange Commission unless such offer or sale qualifies as an exempt transaction under Section 10 of the Securities Regulation Code. Singapore: This document
is being distributed in Singapore by Standard Chartered Bank Singapore Branch only to accredited investors, expert investors or institutional investors, as defined in
the Securities and Futures Act, Chapter 289 of Singapore. Recipients in Singapore should contact Standard Chartered Bank Singapore Branch in relation to any
matters arising from, or in connection with, this document. South Africa: SCB is licensed as a Financial Services Provider in terms of Section 8 of the Financial
Advisory and Intermediary Services Act 37 of 2002. SCB is a Registered Credit Provider in terms of the National Credit Act 34 of 2005 under registration number
NCRCP4. Thailand: This document is intended to circulate only general information and prepare exclusively for the benefit of Institutional Investors with the
conditions and as defined in the Notifications of the Office of the Securities and Exchange Commission relating to the exemption of investment advisory service, as
amended and supplemented from time to time. It is not intended to provide for the public. United States: Except for any documents relating to foreign exchange, FX
or global FX, Rates or Commodities, distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as
defined in Rule 15a-6(a)(2) under the US Securities Exchange Act of 1934. All US persons that receive this document by their acceptance thereof represent and
agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting
additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of
Standard Chartered Securities (North America) Inc., 1095 Avenue of the Americas, New York, N.Y. 10036, US, tel +1 212 667 0700. WE DO NOT OFFER OR SELL
SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE
COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN
EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE,
OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE,
OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS.
Copyright 2014 Standard Chartered Bank and its affiliates. All rights reserved. All copyrights subsisting and arising out of all materials, text, articles and
information contained herein is the property of Standard Chartered Bank and/or its affiliates, and may not be reproduced, redistributed, amended, modified, adapted,
transmitted in any form, or translated in any way without the prior written permission of Standard Chartered Bank.

6 August 2014

11