SMM

SMM: Couple of upgrades in the street this morning. OCBC notes that Sembcorp Marine’s share price has fallen by about 10% since early Sep, with about half of this drop in the last five trading days. Believe that this is partly due to weaker oil prices of late, as well as company-specific factors such as worries over execution risks for its new drillship. According to the house checks, the first drillship has finally left for Brazil, and SMM has reiterated that the unit is still on track for Jun 2015 delivery. The house had been forecasting operating margins of 11.7% for FY14 and 12.6% for FY15 (1H14: 11.3%). To be more conservative, lower FY15 margin assumption to 11.9%. With this, see limited downside risks to margins. Though fair value estimate is correspondingly lowered from $4.36 to $4.18, see a 20.5% upside (this includes a ~4% dividend yield) on the stock, which is attractive. Upgrade to BUY on SMM, as the recent sell-down seems to be overdone CIMB upgrades to ADD with TP $4.11. At 11.7x CY15 P/E, SMM is trading at -0.5 s.d. to its 5-year average. Its P/B of 2.55x is close to its GFC level in 2009. With its first drillship finally en route to Brazil for completion works, believe SMM has crossed a new execution hurdle, and negatives from the delays have been priced in. The drillship is on track for delivery in Jun/Jul 15. Nonetheless, cut FY15-16 EPS forecasts by 2-11%, mainly to factor in lower orders for 2015-16 (from $4.5bn to $4bn p.a.). Upgrade SMM from Neutral to Add, albeit with a lower target price of $4.11, still based on 13.5x P/E (10% discount to the long-term cycle average of 15x). Over the short-term, think contract wins and a stronger 2H14 could re-rate the stock.