Here are 'initial teething issues' of Sembcorp Marine's Brazil yard

Its 82.5ha yard is underway.

According to OCBC, Sembcorp Marine (SMM) is currently building a 82.5ha yard in Brazil to undertake drillship construction, amongst others. Its first drillship has achieved initial recognition with more than 20% completion in Singapore, and OCBC expects Brazil to take the baton in end 2013 or early 2014.

Like most facilities, there is a possibility of initial teething issues. Indeed, if inflation in Brazil continues to be unrelenting, SMM may face further margin pressures from labour costs, especially since there is already a shortage of skilled labour in the country.

Here's more from OCBC:

Keppel Corporation (KEP) already has an established yard in Brazil (its BrasFELS yard has been in operation since 2000), and though it may face the problem of higher labour costs, there may be higher execution risk in SMM’s new yard.

KEP is also building semi-submersible rigs instead of drillships in Brazil.

As the drillship is a new product for SMM, the group will adopt a conservative stance on profit recognition in the early stages of construction.

Contingencies are likely to be released towards the end of construction, assuming smooth execution. Hence, we expect this conservative stance to remain for at least the whole of this year.

Over the longer term, however, we believe that SMM’s foray into the drillship business puts it in good stead to secure more drillship orders, diversifying its product range.

In the shorter term, however, we prefer to be more prudent on the group’s operating margin assumptions, and lower these to 12.1% and 12.3% for FY13F and FY14, respectively (2012: 12.5%).

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