We brought a group of investors to meet up with Mr Tan Kwi Kin, Group President and CEO, and also visited SembCorp Marine’s (SMM) yards last Friday. The key takeaways are reaffirmation on the quality of SMM’s order book and the group’s ability to secure other types of new orders despite the credit crunch. We believe that the share price (at 6.7x FY09 PE) is attractive, and retain the BUY rating on SMM. Fair value is S$1.88.

New orders for conversions to remain healthy. While acknowledging that the pickup in new rig orders is dependent on the lifting of credit crunch, SMM is confident that 2009 is unlikely to be a barren year for new orders. The group is still getting good enquiries on offshore conversion jobs, and is exploring the possibility of getting contracts on uncompleted units from clients.

Likelihood of more cash payment re-scheduling is low. We believe that cash payment re-scheduling risks are now lower than previous expectation; after SMM updates that its work progress for all rigs is on-schedule, with high cash payment collected to date. The two jackup rigs payment rescheduling with Seadrill should be seen as a one-off event, due to unusually lower cash payment collected, vs. corresponding work-in-progress.

Lower cancellation risks. SMM reaffirms that there is no customer asking for cancellations y-t-d. This reaffirms the elimination process (as per our report dated 25 Feb), based on cash collection to-date for each contract (>50%) and the leveraged position of clients, which suggests orders cancellation risk may be less than our current view.

A favorable risk/reward investment. We like SMM for three reasons: 1) Upside potential to our earnings forecast, which is one of the lowest in the market, due to our in-house methodology that argues for possible 15% orders cancellation risk, 2) Undemanding low 6.7x FY09 PE at current price, and 3) Ability to improve on project execution with better profit margins. Maintain BUY.