Valuation. We have contemplated switching to P/B valuation metrics for the rig builders as earnings are seemingly heading for a decline. However, the market continues to correlate the share prices to the movement of oil price which inherently is an expectation for a translation to rig orders (thus earnings). Moreover, current P/B valuations for the rig builders are at substantial premiums to the STI. Although both rig builders might not experience the same explosion in new rig orders as the previous cycle, we are mindful of the powerful re-rating effects of contract wins. As such, we continue to use P/E as a valuation metric for the rig builders.

Prefer SMM over KepCorp. National oil companies and oil majors are holding out to observe the credit and oil price economics but we think that contract awards for newbuilds will return, most obviously from Petrobras. However, the delay in award is increasingly inducing share price caps. We prefer SMM as we think its current S$7.9b orderbook recognition will be better spaced out and that it could win at least one more contract by end 2009. While KepCorp has underperformed on its current contracts wins, it could potentially surprise on the upside with the 8 FPSO hull job and with its stronger geographical positioning in Brazil (BrasFELs yard). But we remain cautious at this juncture with six other strong bidders for the job. In summary, we think KepCorp and SMM will definitely participate in Petrobras' capex plans but the eventual degree of engagement will only be clarified after the awards. We maintain our BUY rating for SMM [Fair value: S$3.67] and HOLD rating for KepCorp [Fair Value: S$8.20]. Long term investors can accumulate KepCorp around S$7.40.