Sembcorp Marine: S$2.05, BUY (TP: S$2.49) - Don't underestimate its value

We valued SCM from another angle and concluded that SCM’s intrinsic value could possibly exceed S$2.90.
S$2.18 from repair and conversion projects - We performed a simple calculation on the net cash flow generated from the repair and conversion projects (assuming debt-free, capex equals depreciation and conservative operating profit margin (OPM) of 22%) and discounted at the rate of 8%. Our simple arithmetic calculation shows that if this counter-cyclical business division is to generate S$2b of revenue per year (to perpetuity), the net present value (NPV) would be S$2.18 (or 88% of our TP).
S$0.72 from rigbuilding division - We ran an analysis of this scenario in a similar fashion, assuming one semi-submersible and one jack-up to be delivered per year. We took both as individual annuity of net cash flow at OPM of 8-10% and discounted rate of 8%, deriving a combined NPV of S$0.72 per share. We believe our assumptions are not unreasonable, given that the management’s mid-term strategy is to deliver 2 semi-submersibles and 2 units of jack-ups/floating production units per year.

We believe the stretched-test for SCM’s worst case scenario would imply business activity constricted to only repair and conversion projects (assuming no new contracts secured – which we believe to be unrealistic) at an intrinsic fundamental value of S$2.18 (and this is still 6% higher than Friday's closing price of S$2.05). However, we believe this is unlikely to be so, as SCM has progressed into an internationally-renowned rig-builder, just second to Keppel Corp.

We chose the conservative S$2.49 as target price, which is based on to sum-of-the-parts valuation:
P/E of 12x FY09 blended earnings for SCM’s rigbuilding, repair and conversion sectors;
Implied value of SCM’s 30% stake in Cosco Shipyard Group (with reference to the implied P/E of 3x FY09 EPS of our valuation in Cosco Corp)
4.98% equity interest of Cosco Corp at Cosco’s TP of S$0.68

The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned