SembCorp Marine - Maintain Hold; TP S$3.00

We keep our earnings estimates unchanged, but raise our target price to S$3.00 from S$2.30 based on a sum-of-the-parts valuation. For the core O&M business, we use a target Dec FY10E P/B of ~4x (raised from 3x), which is the average PB multiple in the recent cycle.

Our earlier upgrade on SMM from Sell to Hold was partially driven by our view customer cancellation risks have already been priced into the stock. Financing issues remain for a few selected customers, and could likely lead to selling pressure, but we like SMM's strong footing in fixed production platforms. The acquisition of SOME has established itself as a strong beneficiary from the strength in the production cycle.We see upside risks to our earnings forecast.

We value SembCorp Marine on sum-of-the-parts valuation, giving us a target price of S$3.00. For the core O&M business, we use a target Dec FY10E P/B of 4x, which is the historical average PB multiple of the recent cycle. We use P/B as our valuation approach for shipyard value as shipyard earnings have become less visible in the face of a slower orders momentum. We use 2010E valuation for the O&M sector as the bulk of the existing order book will be recognized by 2010. We derive our fair value estimate for SMM's 30% stake in Cosco Shipyard Group based on our valuation for COS's shipyards. We value SMM's 5% stake in COS based on our COS target price of S$1.20.

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