Maintain BUY
Previous Rating: BUY
Current Price: S$3.81
Fair Value: S$5.70
Uncertainty in the market... Aug will be marked as the month in 2011 when heightened risk aversion in equity markets drove prices down, impacting high-beta stocks such as Sembcorp Marine (SMM). Though the fall in SMM's share price is understandable with the negative market sentiment and correction in oil prices, the stock looks over-sold at current levels, trading at 11x forward P/E - one standard deviation below its five-year historical mean of 16x. The last time SMM was trading at this level was in early Oct 08, while its lowest point was 5.5x, also in the same month.
... but not in the industry, yet. Though there is no escaping the cyclical macro downtrend, the main driver of the offshore oil and gas industry still boils down to the level of oil price which is still hovering above the US$75/bbl threshold that will sustain most capital expenditure in deeper water projects. Day rates for premium jack-up rigs (which SMM has been receiving orders) have been increasing, in contrast to lower spec rigs (Exhibit 4). We have also collated recent comments from SMM's key customers, and according to established players such as Seadrill, the market for premium jack-up rigs continued to show improvement with strong interest from customers, increased tendering activity and upward trends in day rates in most regions. This is because oil companies remain attracted to the safety and efficiency gains offered by newer and high spec jack-up rigs. That said, oil prices still depend on the health of the global economy, for the demand of oil rests on the consumption growth of major economies. Increasing risks of a US economic recession and the paralysed state of affairs in the EU give investors good reason to stay at the sidelines for now.
Still optimistic about new order wins. SMM has met about 60% of our full year new order estimate of S$4.5b, but we remain optimistic about new order wins, underpinned by still strong fundamentals of the offshore industry. Besides jackups, the group is also looking at both fixed and floating production units for potential work. However, with the unfavourable macro set-up for cyclicals, we have lowered our peg for SMM's operations (ex- Cosco) to 14x blended FY11/ 12F earnings (prev. 16x) and updated the market value of Cosco Corp, hence reducing our fair value estimate to S$5.70 (prev. S$6.30). Maintain BUY.
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