SembMar

OCBC on 1 June 2012

Though oil prices have corrected, we opine that at current levels, oil prices are still elevated and we expect continued capital expenditure in the sector which takes a long term view. Recent comments by offshore drillers in the latest quarterly results also reflected their belief in the strong fundamentals of the industry. Sembcorp Marine (SMM) has a net order book of S$7.4b with deliveries stretching till 2Q15, and this provides good earnings visibility at a time when uncertainties are still prevalent in the global economy and there is a general lack of clarity in terms of corporate earnings outlook. Its share price has fallen by 15.1% since we downgraded it to Hold a few months ago. With an expected upside potential of 14.8% (excl dividends) now, we upgrade our rating to BUY with an unchanged fair value estimate of S$5.12.

Easing oil prices, but still above threshold
Though oil prices have corrected, we opine that at current levels (WTI: US$88/bbl, Brent: US$105/bbl), oil prices are still elevated. As deepwater offshore projects typically need a threshold level of US$70-75/bbl for a safe cushion to be viable investments, we expect continued capital expenditure in the sector which takes a long-term view due to strong industry fundamentals and the long lead time required for offshore projects.

Offshore drillers remain upbeat
The difference between new and older assets has also been accentuating over the years, evidenced by a divergence in utilisation and day rates. Recent comments by offshore drillers in the latest quarterly results also reflected their belief in the strong fundamentals of the industry and companies such as Seadrill are keen on more newbuilds.

Strong outstanding order book provides defensiveness
Sembcorp Marine has a net order book of S$7.4b with deliveries stretching till 2Q15, and this provides good earnings visibility at a time when uncertainties are still prevalent in the global economy and there is a general lack of clarity in terms of corporate earnings outlook. The group has secured orders worth about S$3b YTD, accounting for 34% of our full year estimate which includes orders from Petrobras.

Stock has eased quite a bit; upgrade to BUY
SMM’s share price has fallen by 15.1% since we downgraded it to Hold a few months ago in our report “Looking beyond FY11”, 24 Feb 2012. This compares with the STI’s 6.9% drop over the same period. At current price levels, we see value emerging in SMM’s stock. With an expected upside potential of 14.8% (excl dividends) now, we upgrade our rating to BUY with an unchanged fair value estimate of S$5.12.