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EPA/HO/SCANPIX

SMM has underperformed KEP…

Sembcorp Marine’s (SMM) share price has dropped by about 13.9% vs

Keppel Corp’s (KEP) 8.7% fall since we switched our preference from

SMM to KEP in late Feb (24 Feb 2012 report). We believe this is partly

due to several reasons: 1) risk-off sentiment particularly in May which

has affected the higher beta SMM stock, 2) earnings disappointment for

SMM in its 1Q12 earnings, and 3) recovery in sentiment amongst

property stocks (KEP has a property arm).

… but the trend may reverse in the months ahead

However, we believe that this trend may reverse in the coming months,

and now favour SMM. Although there is a possibility of further market

volatility due to Eurozone concerns which may affect the higher-beta

SMM more, we think that the recent sell-down in the stock is

unwarranted, as: 1) we still hold a positive view on the premium offshore

rig market, 2) SMM is likely to catch up in the orders front in the months

ahead (partly due to Petrobras orders), 3) SMM’s earnings are expected

to pick up in 2H12, and 4) so-called “speculative builds” at SMM are

probably better-termed “opportunistic builds”.

Newbuild enquiries remain healthy

Enquiries for newbuild rigs remain healthy as major oil companies take a

long-term view on oil prices in their capital expenditure plans and hence

are much less affected by short term fluctuations in oil prices. The

utilisation levels and dayrates for premium rigs remain strong and the

outlook for this sub-sector is still positive.

Order book provides defensiveness

Sembcorp Marine’s net order book of S$7.4b provides good earnings

visibility at a time when uncertainty in the global economy has resulted

in a general lack of clarity in corporate earnings outlook. We roll over our

valuation to blended FY12/13F core earnings with an unchanged peg of

14x for the offshore & marine business (ex-Cosco Shipyard Group), and

update the market value of Cosco Corp in our SOTP valuation. As such,

our fair value estimate rises from S$5.13 to S$5.71. Maintain BUY.

SMM has underperformed KEP…

Sembcorp Marine’s (SMM) share price has

dropped by about 13.9% vs Keppel Corp’s

(KEP) 8.7% fall since we switched our

preference from SMM to KEP in late Feb (24

Feb 2012 report). We believe this is partly

due to several reasons: 1) risk-off sentiment

particularly in May which has affected the

higher beta SMM stock, 2) earnings

disappointment for SMM in its 1Q12 earnings,

and 3) recovery in sentiment amongst

property stocks (KEP has a property arm).

… but the trend may reverse in the

months ahead

However, we believe that this trend may

reverse in the coming months, and now

favour SMM. Although there is a possibility of

further market volatility due to Eurozone

concerns which may affect the higher-beta

SMM more, we think that the recent selldown

in the stock is unwarranted, as: 1) we

still hold a positive view on the premium

offshore rig market, 2) SMM is likely to catch

up in the orders front in the months ahead

(partly due to Petrobras orders), 3) SMM’s

earnings are expected to pick up in 2H12,

and 4) so-called “speculative builds” at SMM

are probably better-termed “opportunistic

builds”.

Newbuild enquiries remain healthy

Enquiries for newbuild rigs remain healthy as

major oil companies take a long-term view

on oil prices in their capital expenditure plans

and hence are much less affected by short

term fluctuations in oil prices. The utilisation

levels and dayrates for premium rigs remain

strong and the outlook for this sub-sector is

still positive.

Order book provides defensiveness

Sembcorp Marine’s net order book of S$7.4b

provides good earnings visibility at a time

when uncertainty in the global economy has

resulted in a general lack of clarity in

corporate earnings outlook. We roll over our

valuation to blended FY12/13F core earnings

with an unchanged peg of 14x for the

offshore & marine business (ex-Cosco

Shipyard Group), and update the market

value of Cosco Corp in our SOTP valuation.

As such, our fair value estimate rises from

S$5.13 to S$5.71. Maintain BUY.