by Morgan Stanley (27 May)
Summary: We retain our 'overweight-V' ratin, while our mid-cycle multiple of 18 times 09 estimates is unchanged.
However, extended visibility of orders from Petrobras' recent announcement and high oil prices could push the stock near its peak trading range of 20 times.
What's New: Last week, we hosted the management of SembCorp Marine (SMM) to meet with US-based clients. We came out more confident about the business fundamentals and less apprehensive about industry concerns.
Investor feedback: Investors are very bullish on the macro theme of oil services industry, yet concerned by rig builder's limited operating leverage.
Positive takeaways from meetings include: Strong order momentum, order visibility from the Petrobras announcement, capacity expansion option, and revenue per unit increase due to input cost increase and margin improvement.
What's changed: Our EPS estimate revision is based on lower earnings from 30 per cent owned subsidiary Cosco and slower than expected order flow in H1 08 taking 2008 EPS lower by 9 per cent, but our 2009 estimates move up based on higher-than-expected margin from improved pricing power.
Risks do exist: SMM's stock price is up 27 per cent in the last three months, while the oil price is up 33 per cent in the same period. The stock is trading at 18 times forward earnings, above its long-term average. We believe lots of positive news has been factored in the price.
-Research Report by Morgan Stanley (27 May)
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