We expect the dissipation of order cancellation risk for rig builders to gain momentum after mid-2009, and have made symbolic cuts to the assumptions used in our earnings models by 15-20%. We are also re-rating the rig builders' various businesses to that used in a normalized early recovery cycle, vs. trough valuation previously. Our top pick is SembCorp Marine (SMM), with fair value at S$2.57. SembCorp Industries (SCI) is upgraded to BUY, with fair value at S$3.13. We retain FULLY VALUED on Keppel Corp (KEP), despite raising its fair value to S$4.45. We see the implied 17.1x FY10 PE for KEP's O&M as expensive, vs. 18-20x peak cycle PE.

We have raised fair value for SMM ? Our top pick. We are re-rating the valuation metrics used for the rig builders' various businesses to that used in a normalized early cycle, vs. trough valuation previously. This is in line with DBS Vickers' regional research view that the worst for the equity market is over, and the equity risk premiums for various regional equity markets would normalize upwards. We retain our BUY rating on SMM, with an upward revised fair value of S$2.57. This result in the upgrade of our rating for SCI, SMM's parent company, to a BUY, with fair value at S$3.13.

The optimism is also due to symbolic cuts in order cancellation assumption. We expect the overhang of order cancellation news flow on the rig builders to slowly dissipate after mid-2009, due to: 1) Full cash payments being collected as more rigs are delivered, and 2) Higher cash collections for rigs under construction. We assume a slightly lower 10% order cancellation probability for KEP's offshore and marine (O&M) order book (vs. 12% previously) and 12% for SMM (vs. 15% previously), and may reduce them further in the months ahead.

But, we retain FULLY VALUED on KEP, as the implied FY10 PE for its O&M is near to peak cycle valuation. We prefer SMM to KEP for investment exposure to rig builders, as it can sustain revenue growth till FY10, while KEP's peak revenue may have occurred in 2H08. We estimate that KEP needs to win S$6-7b new orders in 2009 before its revenue in FY10 is able to match the O&M's peak revenue in FY08, due to its high base effect and the faster drawdown in order book. We retain FULLY VALUED on KEP, despite raising its fair value to S$4.45. We believe that the 17.1x implied FY10 PE for KEP's O&M is expensive, vs. 18-20x peak cycle PE for rig building. We advise investors who want property exposure to switch from KEP to Keppel Land [BUY, S$2.17].