Much hope is pinned on Petrobras’ capex, as enquiries from other customers remain low. Petrobras will need 28 more drilling rigs (semis and drillships) over the next five years (5-6 p.a.) as part of its expansion. Competition will be intense. Of the 12 rig contracts awarded by Petrobras in 2008, only one was secured by Singapore. South Korean shipyards benefitted the most as most of the contracts were for drillship newbuilds. Lower margins. Petrobras is now preparing to issue tenders in 3Q09 requesting the provision of as many as 7-8 newbuild floaters for contract start-up from 2013, according to ODS-Petrodata. We estimate shipyard contracts could total US$5b-6b (S$7b-9b). However, history has shown that for shipyards, Petrobras projects typically have lower margins than projects for other customers.
No change in target price and earnings forecasts. Our fair price of S$2.60 is pegged to our sum-of-the-parts (SOTP) valuation of S$2.56/share. Our SOTP valuation is premised on the following: a) SMM’s sustainable contract wins level of S$3b p.a. in the longer term, translating into an annual net profit base of S$235m, b) SMM’s own shipyard is valued at a PE of 15.0x (i.e. preoffshore oil & gas boom valuation for large shipyards), and c) SMM’s 30% stake in CSG is valued at a PE of 8.0x (i.e. pre-offshore oil & gas boom valuation for large shipyards) of its earnings based on long-term sustainable contract wins of S$2.0b p.a.
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