Sembcorp Marine

Prepared by : Loke Chee KinJoyce Feng

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Agenda

�Company Background

�Business Drivers

�Financial Analysis

�Risk Factors

�Peer Comparison

�Conclusion

�Q & A

Company Background

�Sembcorp Marine (SMM) is a global marine and offshore engineering group, specialising in integrated solutions in ship repair, building, conversion, rig building and offshore engineering & construction.

Business Segment

14%

67%

18%

1%

% Sales (FY 2010)

Ship repair

Rig Building

Ship

Conversion

/offshore

16%

54%

29%

1%

% Sales (9M 2011)

Ship repair

Rig Building

Ship

Conversion

/offshore

Source : Company Annual Report

Business Drivers

�Oil and natural gas prices

- Supply and demand

�Upstream capital expenditures

- Spending by Oil & Gas (O&G) industry

�Worldwide rig count

- Rig demand driven by O&G prices

Case for Higher Oil Prices

�Rising world-wide energy demand

- driven by Emerging markets

�Uncertainty in world events

- Civil wars, terror attacks, etc

�Supply not keeping up with demand

- long lead time to increase oil production

Definitions

OPEC

- Organization of the Petroleum Exporting Countries- Current 12 members - Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela

EIA- U.S. Energy Information Administration

British Thermal

Unit (BTU)

- amount of heat required to increase the temperature of a pint of water (16 ounces) by one F. - BTUs are measurements of energy consumption, equivalent to kilowatt-hours (3412 BTUs = 1 kWh) or joules (1 BTU = 1,055.06 joules). -A wooden kitchen match - 1 BTU, and air conditioners for household between 5,000 and 15,000 BTU.

World Energy Consumption

0

100

200

300

400

500

600

700

800

900

1990 2000 2008 2015 2020 2025 2030 2035

OECD Non-OECD Total

Source : EIA

quadrillion Btu

Oil Demand

Source : OPEC

87.8mb/d

Oil Supply

Source : OPEC

88.35

WTI Crude Oil Price

0

20

40

60

80

100

120

Jan 2010Jul 2010Jan 2011Jul 2011Jan 2012Jul 2012

West Texas Intermediate (WTI) Crude Oil Price

Historical spot price STEO price forecast

110

90

70

Source: Short-Term Energy Outlook, November 2011, EIA

dollars per

barrel

OPEC Basket Price

020406080

100120140160

Weighted Average Value ($US)

Weighted Average Value ($US)

Source : Organization of the Petroleum Exporting Countries

112

38

140

Crude Oil Forecast

� “EIA expects the U.S. average refiner acquisition cost of crude oil to remain relatively flat, averaging about $100 per barrel in 2011 and 2012...” – EIA

� “EIA expects that world crude oil and liquid fuels consumption will grow from its record‐high level of 87.1 million barrelsper day (bbl/d) in 2010 to 88.2 million bbl/d in 2011 and 89.6 million

bbl/d in 2012” – EIA

� “World oil demand is forecast to grow by 1.2 mb/d in 2012 to average 89.0 mb/d.” - OPEC

OPEC Quotes

- Jan 2009

- Nov 2011

Upstream Capital Expenditures

� “Worldwide upstream oil and gas spending in 2012 will climb by 10% to reach $598 billion, according to a recent outlook by Barclays Capital...” – Oil and Gas Journal, Dec 2011

� Petrobras, will invest nearly $55 billion in 2012... it would invest $224.7 billion in the 2011-2015 period, the largest capital expenditure budget in the oil industry...” – Dow Jones Newswires, Aug 2011

� “Chevron announced a $32.7 billion capital and exploratory spending program for 2012...” - rigzone Dec, 2011

Upstream Capital Expenditures

� “ConocoPhillips said it would spend $15.5B on capital projects next year, about 15% higher than its estimated 2011 budget.” - rigzone Dec, 2011

� “Lukoil Group's investment costs for 2012-2014 are expected to be approximately $48 billion, including $13.9billion in 2012.” - rigzone Dec, 2011

Recent Rig Counts

�Rig count – measures business health for the drilling industry and suppliers

�Leading indicator for demand for oil drilling

Recent Rig Counts

22421829

21742395

27463043 3116

3336

2304

2985

3429

0

500

1000

1500

2000

2500

3000

3500

4000

Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Oct-11

Average Total World Rig count

Average Total World Rig count

Source : Baker Hughes

Recent Rig Counts

Source : Baker Hughes

AreaLast

CountCount

Change from prior

count

Date of prior count

Change from Last year

Date of Last

year’s count

U.S.2 Dec

111993 -7

23 Nov 11

+28024 Nov 2010

Canada2 Dec

11484 Unchanged

23 Nov 11

+3524 Nov 2010

InternationalOct

20111197 +23

Sept2011

+98Sept2010

Business Drivers – a Checklist

�Oil and natural gas prices

- favorable oil prices for exploration

� Increased upstream capital expenditures

- Recent spending activity by Oil & Gas (O&G) industry

�Worldwide rig count

- Increasing number of oil rigs

Outlook for the oil and gas industry

�Medium and long-term fundamentals positive.

� Increasing long-term demand for oil

� High energy price

� Exploration and production (E&P) are increasing further into 2013

�Affected by global economy.

� Euro debt crisis

� US economic slowdown

� Concerns over China

Order Book & Sales Analysis

Sales & Order Book

Source : Company

Sales & Order Book

�Total sales over preceding year net order book ratio ranges from 63% to 82%

0

2000

4000

6000

8000

10000

12000

14000

16000

2004 2005 2006 2007 2008 2009 2010 9M

2011

S$

'M

Sales Order BookSource : Company

Order book- Current Options

�Eight options outstanding , worth about US$2b

Order book- Current Options

• Jackup options likely to be exercised

– Above average age of fleets owned by established drillers, e.g. Noble, Atwood

– Utilization rates for new fleets much higher than old ones

– Looking to renew their fleets

– Demand for newer generation rigs

Order book – Outstanding Bid

• In June 2011, Petrobras (leading energy company in Brazil) launched a tender for 21 drilling rigs

• SMM bid for 6 deep-water drilling units, worth about US$4.2bn

• The winners of the tender could be announced by 1Q 2012

• In a strong position to win a drillship order

– The fourth lowest bidder in the initial tender

Capacity Expansion to Fuel Growth

• New integrated yard in Singapore at Tuas (206 ha) over 16 year

– Partial operations in 2012, completion at end-2013

– Increase revenue in the high-margin ship repair business from S$646mn in 2010 to S$1.2-1.3bn in 2014

• New yard in Brazil

– Plan to establish a greenfield yard in Brazil

– Invest US$350-500mn over the next two-three years

– Have received environmental permits for the yard

Risk Factors

Risk Factors

�If a significant number of current customers cancel orders without providing adequate compensation

�Poor execution of order book, slow recognition of revenue

�More challenging macro environment and prolonged credit crunch have affected the pace of contract awards

Re-rating

�Stimulus provided by European government and another round of QE conducted by the US government would improve global sentiment and result in a spike in crude oil price.

�The drillers would take a more positive view of capex and exercise more order option and award more contracts.

Peer Comparison

Peer Comparison

Note : ttm dividend yield inclusive of special dividend

SMM KEP STI^

Last Price/Index 3.70 9.00 2,635.25

Current P/E 10.09 9.14 7.45

Estimated P/E (12/11) 10.82 10.87 -

Market Cap (M SGD) 7,705.09 16,053.19 438,076.31

Price/Book (mrq) 3.55 2.35 1.26

EPS (SGD) (ttm) 0.37 0.98 -

Est. EPS (SGD) (12/11) 0.34 0.83 -

Volume (M) 10.43 4.99 -

Last Dividend 0.36 0.42 -

Dividend Yield (SGD) (ttm) 9.73% 4.52% 4.17%

Shares Outstanding (M) 2,082.46 1,783.69 -

Source: Bloomberg Last price as of 15.12.2011

abbr. mrq = Most Recent Quarter; ttm = Trailing Twelve Months

SMM – Dividend Information

Source : Company

Keppel – Dividend Information

YearGross Dividends

(cents)Special Dividends

(cents)2010 42 -

2009 38 ~23.02008 35 -

2007 19 452006 14 14

Source : Company (Keppel Corp)

Keppel vs SMM vs STI

5-10% outperform STI

10-40% underperform STI

Order intake weaker than Keppel

• SMM 9m order book – S$5.2bn

• Keppel 9m order book – S$8.2bn

• However Keppel has greater capacity in jackupcontracts.

• Order intake relative to capacity similar

• SMM has more slots for 2013-2014 deliveries (Keppel-3,SMM-5), would command a pricing premium

• Keppel’s order momentum slow, while SMM’s order momentum continuing

Valuation

Recent Developments

�Lower sales (9M2011) decrease by17.1% to $2,962.6M mainly due to many new jackup rig building projects, secured since 4Q 2010, still at the planning stage

�9M 2010

- revenue recognition on delivery of Petro Rig III

semisubmersible rig

- the sale of CJ-70 harsh environment jack-up rig

Recent Developments

�higher revenue recognition from ship conversion and offshore projects

�gross profit was lower mainly due to fewer jack-up and semi-submersible rig projects. (i.e. ship repair, shipbuilding offshore engineering & construction less profitable)

Valuation

For the year

2006 $’000

2007$’000

2008$’000

2009 $’000

2010 $’000

E2011$’000

Turnover 3,545,049 4,513,123 5,063,948 5,724,742 4,554,863 4,047,200

EBIT 228,233 349,029 501,837 862,354 942,564 733,542

ProfitBefore

Tax312,523 369,502 545,198 906,059 1,077,888 837,342

Net Profit 240,040 245,770 430,158 698,542 860,266 729,385

Projection

For the yearF2011$’000

F 2012$’000

F2013$’000

F2014$’000

Turnover 4,047,200 4,427,534 4,753,548 5,052,526

EBIT 733,542 795,956 854,639 908,455

Profit Before Tax

837,342 886,773 948,147 1,004,788

Net Profit 749,385 736,022 786,962 833,974

Key Data

�52-week range S$3.05 - S$6.03

�Market capitalization S7,610.85M

�Shares outstanding 2,077.90M

�Free Float 35%

�Avg. daily volume (‘000) 11,806

�Avg. daily volume (M) S$46.9

Recommendation

Cost of Equity 9.5%

Cost of Debt 3.4%

Weighted Average cost of Capital 9.1%

Forward Revenue CAGR 5.8%

Fair Value $4.24

Current price (As of 15.12.2011) $3.70

Projected P/E 12.1

• Based on FCFF - BUY

Summary

�Long term demand for energy remains stable

�Uncertain Macro factors headwind (debt crisis in US, Euro zone)

�Buy ~ 14.5% upside