Sembcorp Marine rig contract win has growth caveats

We view this contract win positively as the Prosafe win effectively expands both Sembcorp Marine’s customer base (Prosafe is a new customer) and adds to its product offering (semi-sub accommodation rigs). We also note that Sembcorp Marine has been winning a steady stream of contracts within the offshore accommodation space (March 2010:S$550 mil Ekofisk accommodation topside, July 2011: S$600mil PTTEP processing and living quarters platform)

We value Sembcorp Marine based on our SOTP methodology to arrive at our target price of $4.31. Our target price of $4.31 implies a valuation of 15x FY12E earnings, in line with average historical valuations.

While the recent contract win is encouraging, we observed that rig ordering (for drilling) activity in the Singaporean yards have remained muted in the past two to three months despite relatively high oil prices and a gradual recovery of drilling activities in the U.S Gulf of Mexico. We believe that this is due to a combination of 1) difficulty in securing adequate/cheap credit financing for rig purchases, especially for the unestablished players 2) deliveries at most established yards now stretches all the way to 2014,which increases the risk of ordering 3) weak outlook on the global economy.

Going forward, we believe these factors shall continue to play a part in capping further rig orders unless there is a clear resolution to the current economic crisis. At present, we continue to see limited upside from Sembcorp Marine’s previous closing price. Maintain Hold.