Investment Conclusion: We are raising our price targets significantly. Our revised cost of equity is a key driver. But we also see an improved outlook in O&M based on recent industry discussions, and are raising our medium-term order assumptions. On a 12-month view, we still think that compelling upside can only be justified by assuming record order intakes in perpetuity as of 2011, which we see as challenging. In this context, our preferred names are SCI, followed by Keppel.

PBR tender #1 is a positive catalyst for Singapore: We think the PBR deepwater rig tender, expected in 3Q09 could comprise around seven vessels, with a high number of semisubs. This would favor the Singapore yards who lead this category and have a strong Brazilian presence – a key consideration. The consensus view is that PBR’s tenders will be split 50/50 between semisubs and drillships (which the Korean yards specialize in).

Keppel is preferred O&M play: It is best positioned for the coming PBR tenders, we think. We also see the stock as cheap vs. SMM with a better risk/reward, driven by Brazil work. The sale of SPC has addressed balance sheet concerns. We raise Keppel to Equal-weight.

Buy SCI for cheap exposure to SMM: We see SMM stock as expensive, but also as well positioned for upcoming PBR tenders. We think SCI stock offers a cheap implied entry price of S$1.95 into SMM (versus a current price of S$2.85). We raise SCI to Overweight.

Even COSCO could surprise: We are Underweight on COSCO. But the recent financing tie up between PBR and China Construction Bank could see some already tendered vessels without confirmed yard slots end up in China, where COSCO is the premiere O&M yard.