SembCorp Marine Ltd - Time to Jack-up (POEMS)

BUY (Maintained)

Closing Price S$5.29

Target Price S$6.09(+15.12%)

• Trailing in order wins to its closest competitor.

• Slower than expected semi-submersible order flow.

• Accordingly, we lower eFY12EPS from 33.7 cents to 30.1 cents.

• Maintain BUY recommendation with a revised target price of $6.09.

Trailing in order wins to closest competitor

Since the start of this year, SembCorp Marine’s order wins have greatly trailed those of Keppel offshore & marine wins, having only won S$1.5 billion worth of new orders this year versus Keppel’s S$7.1 billion.

It is shown that SembCorp Marine has been trailing behind Keppel Corp mainly in terms of jack-up order wins. Keppel has secured 20 jack up orders worth S$5.6billion year-to-date while SembCorp Marine has so far only secured 4 jack up order wins worth S$1.4billion. On closer examination, Keppel Corp has fared much better in its flagship jack-up, the KFELS B class so far this year compared to SembCorp Marine’s flagship Pacific class 400.

Looking back into the past 7 years, the Pacific Class 375/400 has performed almost on par with the KFELS B Class. However, only one order for the Pacific Class 400 has been secured so far this year compared to thirteen orders for the Keppel’s B Class. This is by far the largest difference in rig orders between these two flagship rig classes. This difference is of significance because both Keppel Corp and SembCorp Marine each dominate a large portion of the jack-up market (Keppel approx. 40%, SembCorp Marine approx. 25%). Given the limited number of rigs (average of 20 jack up rigs between 2004 to 2010) ordered from the market each year, to lose out on 12 rigs to its closest competitor on its flagship rig, is essentially losing a significant share of the market.

However, we are not unduly worried about the Pacific class seemingly waning popularity unless this situation persists for long (more than a year). This might just be a temporary blip or SembCorp Marine might have been holding out for better deals (better payment terms, higher prices etc).

We remain optimistic on jack-up order wins for SembCorp Marine in the mid- to long-term as long as oil prices do not fall below US$75/bbl for three reasons.1) The global jack up fleet is in need of replacement with two-thirds of the fleet greater than 25 years old and a vast amount of rig orders will have to be placed to renew them which we estimate will take at least another 5 to 10 years of strong orders.

2) Keppel Corp’s yard does not have the capacity to handle all of these orders at once and some of them will eventually go to SembCorp Marine.3) We expect global semi-submersible orders to return eventually, though it may take some time.

Finally, we note that while SembCorp Marine’s flagship jack-up rig seems to be less popular than Keppel’s at this juncture, there is some comfort to the fact that SembCorp Marine has managed to narrow Keppel’s lead in other rig classes since the last quarter of 2010. Most noteworthy is SembCorp Marine’s joint collaboration with Friede & Goldman and Noble Corp for the JU3000N rig, which has seen Noble Corp ordering a total of four rigs from SembCorp Marine worth US$827 million in December 2010 (2 rigs) and March 2011 (2 rigs).

Valuation:

We are lowering our estimates of SembCorp Marine’s rig order wins (jack-up and semisubmersible) for 2011 following what seems to be slower than expected sales of its flagship Pacific Class 400 rigs as well as slower than expected global semi-submersible order flow (SembCorp Marine has yet to bag a semi-sub order win since July’09). Accordingly, we lower our EPS estimate for FY2012 from 33.7 cents to 30.1 cents and our sum-of-the-parts derived target price from $6.60 to $6.09.

Our SOTP based target price of $6.09 implies a valuation of 17.2x average of FY12E and FY13E earnings, which we feel is reasonable given that the average valuation is 15.4x for its corresponding phase of the previous cycle and we have not factored in potential Petrobras orders. We have chosen the average of FY12E and FY13E earnings as our base because any order wins secured now till early next year will mostly be recognized in FY2012 and FY2013.