SembCorp Marine - Price target maintained at $3.22

Our price target is S$3.22 based on our sum-of-the-parts (SOTP) valuation comprising a DCF valuation (over a 20-year period and incorporating a cyclical downturn in earnings from FY11) of the group’s shipyard businesses, which includes the three Singapore yards, as well as earnings from overseas yards including Cosco Shipyard Group, and its remaining 5% stake in Cosco Corp. Our WACC assumptions remain unchanged at 7.5% and zero terminal growth.

With FY09/10E P/E of 12.3x and 12.1x, SMM still trades at the lower end of its historical P/E band of 7x and 28x. FY09/10F ROEs of above 31.6% and 26.8% are creditable for a shipyard group, in our view, and we expect dividends to be maintained for FY09F and FY10F, giving dividend yields of 4% which as attractive relative to peers.

SMM holds net cash of S$1.8bn as at March 2009, of which S$1.2bn are WIP payments, with steady cashflow seen from progressive recognition from its S$9bn order-book. Given that capex requirements can be met from its operating cashflow, we believe the group is unlikely to need to raise capital in the short to medium term Risks to price target: Our price target could be negatively affected by extensive cancellations of the group's O&M orderbook, or by significant losses incurred on these O&M projects, or more associate losses.

Sensitivity analysis. If we assume a 10% cancellation of the group’s offshore rig contracts from its current orderbook, our FY09/10/11 earnings estimate will fall by 8.3%, 7.2% and 6.8%, respectively. Our current earnings forecast already takes into account all announced cancellations and delivery postponements.

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Rowan impact on Keppel

Rowan had previously placed newbuild orders for four Super 116E class Jackup rigs (EXL #1 to EXL #4) with KepCorp. KepCorp is proceeding with the construction of the first three jackups for Rowan with no change in schedule. The last rig continues to have a suspension of construction based on goodwill rendered by KepCorp to Rowan. KepCorp will resume the building of the forth rig in 3Q2009 (unless Rowan officially cancels the construction and pays penalties. Rowan's decision will likely be made during 3Q09 results). At this point in time, we have indications from KepCorp that they "think" Rowan will be resuming the construction.

Rowan has revealed in their investor communications that they are committing about US$273m for the rigs being built at Keppel for 2009. As we know it, all three Jackups have no contracts on hand. While this is a concern, Rowan has a significant number of assets (22 offshore jackups and 30 land rigs) that are operating and generating cash flows.

While 2009 might still show good performance in view of its previous year orderbooks, KepCorp has not won any newbuild contracts for its Offshore division for about 1 year. From our recent visit to KepCorp, management expects the gap to affect its 2010 earnings substantially.

We have a HOLD rating on KepCorp with a fair value of S$6.40. Entry at about S$6.10-6.20 can be explored if your clients are long term investors.

Keppel Corporation - Petrobras to bid out US$4 billion worth hull contracts by July-end; Keppel in the running

Petrobras to bid out US$4billion worth of hull contracts by July- end: Keppel Corp along with 4 other companies (namely Atlantico Sul, 10% Samsung owned, Engevix Engenharia SA and UTC Engenharia SA) are intending to bid for US$4 billion worth of Petrobras contracts to build hulls of FPSOs to be used in Brazil’s pre-salt oil fields (source: Bloomberg). The news article further adds that the companies are likely to submit the proposals between July 17 and July 24 and Petrobras is likely to open the offers on July 31. Petrobras aims to start operating the vessels in 2015 and 2016.

Potentially add S$4.2-6 billion to Keppel Corp’s new contracts versus JPM’s estimate of S$1 billion for FY09E: Assuming Keppel Corp successfully bids for these projects and takes a 70-100% stake within the order (70% is arrived at assuming Keppel successfully bids for Rio Grande wherein news reports (source: Upstream) suggest a 70% stake for KEP) it would add S$4.2-6 billion to the orderbook. Moreover assuming a 7-8% EBIT margin given its a hull contract (this may however be on the higher side for initial contracts given historic performance of ‘new projects’ by Keppel in Brazil), this would potentially add 11-12% to our FY10E / 11E EPS estimates and possibly S$0.30 / share (assuming a 2x on profit contribution). Do note however that our estimates already assume S$0.83 / share Petrobras option value (although this has been assigned only for new rig orders).

Still await news on Rio Grande shipyard purchase; would push Keppel Corp in to lead position for these orders: Given that Rio Grande shipyard has been identified for the assembly work of 8 hulls for the FPSOs, we believe Keppel Corp would be in a ‘leading’ position for the bids of these hulls for FPSOs in case it eventually does take the 70% stake in Rio Grande.