SembCorp Marine - Raising TP to S$5.40, Mainatin Bu

¨ Announces new jack-up rig contract
SembCorp Marine's PPL Shipyard has announced a new contract from Offshore
Group to build a Baker Marine Pacific Class 375 Deep Drilling Offshore
Jack-up Rig at a contract value of US$190m. This is the third in a series
of three identical BMC Pacific 375 design jack-up rigs that Offshore has
ordered. The price tag is also higher than the first order from Offshore,
ordered in October for US$155m, but equivalent to the second unit in
January contracted at US$190m. Construction of the jack-up rig is expected
to commence in the third quarter of 2007 with delivery scheduled in
September 2009. This order pushes SMM's net order book to-date to S$9.1
billion with completion and deliveries until 2010. Of this, S$4.5 billion
secured in 2007 alone.

¨ Earnings upgraded on better prospects for CSG
This latest contract is still within our orderbook expectations. However,
we are raising our FY08 forecasts by 18% to S$382.4m and FY09 by 23% to
S$442.3m, mainly on the back of higher associate earnings. SMM owns a 30%
stake in Cosco Shipyard Group (CSG) and a 6% direct stake in Cosco. We had
recently upgraded Cosco Corp's earnings ? up by 14.8%in FY08 and 28% in
FY09 ? as CSG recently secured orders worth US$1.2bn. We also like SMM's
exposure to CSG for the likelihood of more ship newbuild orders from its
parent China Ocean Shipping, and its new capacity which is just coming
onstream which will bolster earnings. Our earnings upgrade is therefore
mainly a reflection of this.

¨ Core earnings supported by expansion
Looking at SMM's core earnings, rig building will continue to drive
profits, with PPL Shipyard having another stellar year. Elsewhere, SMM's
focus into the production side of the offshore oil and gas sector is also
kicking in. We also expect SMM to be able to take on more jack-up and
production jobs as its yard expansions in Sembawang Shipyard and Karimun
come onstream.

¨ Raising target price to S$5.40, but valuations looking relatively
steep
DCF-fair value target is raised to S$5.40 or an 11% upside potential from
its current price ? hence we are maintaining our Buy call. However, with
the 21% surge in SMM's share price in the last month, the stock is trading
at a FY08 PERs of 19x. Our fair value of S$5.40 implies an FY08 PER of 21x,
which is the upper limit of our valuation threshold. Barring any
significant upward earnings revision, SMM therefore falls down on the
pecking order on our picks for the sector due to its higher valuations.
Furthermore, we would prefer an exposure to Cosco's prospects directly
rather than through SMM. Similarly, we also prefer Keppel Corp, as its
shipyard business currently trades at a cheaper FY08 PER of 16x, by our
estimates. We also see better upside potential for Keppel through its
emerging infrastructure business and from higher property selling prices,
both through Keppel Land and Reflections at Keppel Bay.