Not surprisingly, Petrobras’ plans for 28 drilling rigs and 8 FPSO units merited lots of attention. While agreeing that Petrobras would indeed be one of the larger potential customers, the company took pains to point out that current oil prices will likely result in orders from the Middle East (Saudi Aramco, Iran NOC) & North Africa (Egypt), China as well as Mexico (Pemex). High levels of drilling activity in West Africa will also generate incremental demand for deepwater rigs and production units.
Asked about their plans for the S$1.8bn net cash balance (S$600m excluding S$1.2bn customer advances) and low gearing, SMM hinted at a “near customer” strategy, which we believe points towards asset acquisition/equity partnership in Brazil. In the medium to longer term, consolidation of the yard network is likely, with a focus on efficiency gains and streamlining of operations.
Our target price of S$3.25 would increase to S$3.43 if we took Cosco Corp’s current share price into account, pointing to 11.2% upside. At 8.9x FY10 PER, the stock is trading below its 5-year average PER of 13.5x despite continued strength in execution and strong balance sheet. Further, we expect 2010 to offer more promise as regards order wins. Maintain OUTPERFORM.
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