SembCorp Marine: Concerns overblown

Downside risks from Petromena protected. SMM has terminated the contract for PetroRig I as Petromena has failed to fulfill its final payment. We believe downside risk is limited as SMM is confident of selling the rig given that a) the rig is a proven design b) about 50% of the payment has been collected c) there are 3 ready buyers for this rig with an MOU signed for US$450m. As for Petrorig II and III, risks for these contracts are cushioned by the fact that they are backed by charter contracts and Petromena has signed an MOU for Petrorig III at US$540m, above Petrorig III's contract price of US$524m with SMM.

Petrobras expected to hand out contracts soon? Petrobras awarded contracts for 12 rigs last year, but still needs 28 more deepwater units over the next 5 years to help it meet its ambitious production targets of 2.7m bpd by 2013. We have assumed new contract wins of S$3bn this year, which we believe is achievable, on the back of credit crunch easing from 2H09, as well as uncompleted contracts from other shipyards facing financial difficulties.

BUY Maintained. Maintain BUY rating on SMM, target price maintained S$2.57, using normalized early cycle FY09 PE of 13x for ship repair and 11x for offshore construction and 3x trough valuation PE applied to Cosco Shipyard Group's business. SMM remains our top pick in the oil and gas sector, a key beneficiary of the frimer oil price with potential for earnings upgrades.

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