Sembcorp Marine

OCBC on 27 June 2012

Sembcorp Marine’s (SMM) stock has underperformed Keppel Corporation’s (KEP) since we switched our preference from SMM to KEP in late Feb. 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 (pure O&G play) more, 1) we still hold a positive view on the premium offshore rig market, 2) SMM is likely to catch up in the orders front, 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”. We roll over our valuation to blended FY12/13F core earnings with an unchanged peg of 14x for the offshore & marine business (ex-Cosco), 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 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.