upgrade to BUY

● Outlook remains positive

●

bookDefensiveness from strong order

●

Easing oil prices, but still above

thresholdUpgrade to BUY

Though oil prices have corrected, we opine

that at current levels (WTI: US$88/bbl,

Brent: US$105/bbl), oil prices are still

elevated. As deepwater offshore projects

typically need a threshold level of US$70-

75/bbl for a safe cushion to be viable

investments, we expect continued capital

expenditure in the sector which takes a longterm

view due to strong industry

fundamentals and the long lead time required

for offshore projects.

Offshore drillers remain upbeat

The difference between new and older assets

has also been accentuating over the years,

evidenced by a divergence in utilisation and

day rates. Recent comments by offshore

drillers in the latest quarterly results also

reflected their belief in the strong

fundamentals of the industry and companies

such as Seadrill are keen on more newbuilds.

Strong outstanding order book provides

defensiveness

Sembcorp Marine has a net order book of

S$7.4b with deliveries stretching till 2Q15,

and this provides good earnings visibility at a

time when uncertainties are still prevalent in

the global economy and there is a general

lack of clarity in terms of corporate earnings

outlook. The group has secured orders worth

about S$3b YTD, accounting for 34% of our

full year estimate which includes orders from

Petrobras.

Stock has eased quite a bit upgrade to

BUY

SMM’s share price has fallen by 15.1% since

we downgraded it to Hold a few months ago

in our report “Looking beyond FY11”, 24 Feb

2012. This compares with the STI’s 6.9%

drop over the same period. At current price

levels, we see value emerging in SMM’s

stock. With an expected upside potential of

14.8% (excl dividends) now, we upgrade our

rating to

estimate of S$5.12BUY with an unchanged fair value. (Low Pei Han)