Brokers' Take

SembCorp Marine

May 28 close: $4.43

Morgan Stanley, May 27

Summary: We retain our 'overweight-V' rating and raise our price target to $4.80, while our mid-cycle multiple of 18 times 09 estimates is unchanged.

However, extended visibility of orders from Petrobras' recent announcement and high oil prices could push the stock near its peak trading range of 20 times, implying a near-term price as high as of $5.40.

What's New: Last week, we hosted the management of SembCorp Marine (SMM) to meet with US-based clients. We came out more confident about the business fundamentals and less apprehensive about industry concerns.

Investor feedback: Investors are very bullish on the macro theme of oil services industry, yet concerned by rig builder's limited operating leverage.

Positive takeaways from meetings include: Strong order momentum, order visibility from the Petrobras announcement, capacity expansion option, and revenue per unit increase due to input cost increase and margin improvement.

What's changed: Our EPS estimate revision is based on lower earnings from 30 per cent owned subsidiary Cosco and slower than expected order flow in H1 08 taking 2008 EPS lower by 9 per cent, but our 2009 estimates move up based on higher-than-expected margin from improved pricing power.

Risks do exist: SMM's stock price is up 27 per cent in the last three months, while the oil price is up 33 per cent in the same period. The stock is trading at 18 times forward earnings, above its long-term average. We believe lots of positive news has been factored in the price.

OVERWEIGHT
First Resources May 28 close: $1.13 Macquarie Research, May 26

Event: We hosted First Resources (FR) on a four-day non-deal roadshow in Hong Kong and Singapore. The group, comprising the CEO and IR manager, presented FR's Q1 08 results and its corporate strategy. Investors were positive on the growth story, but in general wanted assurance that the current legal case was closed. We maintain an 'outperform' on First Resources.

Key questions: What is management's FY08 net profit expectation? Likely to exceed its previous expectation of US$110 million (Q1 08 was US$34 million) for the following reasons: Strong Q1 08 crude palm oil production of about 72,000 tonnes, or 24 per cent of the full-year target of 300,000 tonnes. Given the typical bumper crop in H2, FY08 production might reach about 320,000 tonnes (up 15 per cent y-o-y), or 7 per cent higher than guidance.

Strong Ebitda margin likely to be sustainable given an estimated stable production cost of US$200 per tonne for 2008, with the locking in of 40 per cent of the production forward contract and of the price of its FY08 fertiliser requirement at about 10 per cent below the spot price. Even with the potential increase in labour costs, higher production should help achieve stable production costs on a per-tonne basis given that about 75 per cent of costs are fixed costs (labour and fertiliser).

What is FR's dividend policy? There is none currently; however, a dividend policy will be set this year. An expected (positive) net cashflow of US$50 million for FY08 can support a dividend payout of about 20 per cent. But given its growth strategy, FR should remain a capital-appreciation play rather than a dividend play.

What is the viability of biodiesel investments? Biodiesel investment is now viable with the current spread of diesel and palm oil prices, coupled with the export tax differential between palm oil and biodiesel in Indonesia. FR's biodiesel plant of 250,000 tonne per annum is scheduled to start in Q4 08.

What is FR's view on CPO prices? CPO prices are likely to remain firm in the medium term. Palm oil demand for food should remain the key driver with rising consumption from emerging economies. While the potential change in biofuel mandates may influence future demand for biofuel, the response lag in palm oil supply should ensure that supply/demand dynamics remain tight for the next four to five years. Hence, FR expects current CPO prices (about US$1,100 per tonne) to be maintained for the next few years.

Is there any pending legal case? Management assured investors that there were no more pending legal cases and the recent legal case involving ex-shareholder, Martias, has been closed. There has been no impact on the company's financials or plantation assets from this case.
Price catalyst: 12-month price target: $1.60 based on a discounted cash flow methodology.
Catalyst: Rising yield from its young plantations, strong palm oil prices.

Action and recommendation: Maintain Outperform. We continue to like First Resources for its excellent asset quality, good estate management and attractive valuation. MAINTAIN OUTPERFORM

Compiled by CHOW PENN NEE