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Asia Singapore

Energy

28 September 2007

Singapore offshore

Strong order pipelines but

caution over momentumPyari Madhava MenonResearch Analyst

(65) 6423 5546

[email protected]

Christyan MalekResearch Analyst

(44) 20 7545 8249

[email protected]

Stocks pricing in a strong cycle, but little of the risks Valuations currently price in strong growth beyond 2010 for both Keppel andSembcorp Marine (SMM). There is little margin of safety priced in for a reversal inthe current confluence of high order backlog, high rig day rates or the buildinfrastructure supply squeeze. We have initiated coverage of SMM with a SELLrating and downgraded Keppel to HOLD.

Deutsche Bank AG/Hong Kong

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced fromlocal exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors shouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers ofDBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 torequest that a copy of the IR be sent to them.

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1

Initiation of Coverage

GlobalMarketsResea

rch

Dip in day rates could reverse order backlog growth trendOur analysis suggests that except for ultra-deep-water rigs, day rates will

plateau/dip 2008 onwards. This could lead to slower new orders. With high O&Mrevenue run rates of S$1bn and S$1.5bn a quarter for SMM and Keppel, there is achance of the order backlog being reversed, which is correlated with the shareprice performance.

Offshore sector does not need to cool for supply crunch to easeA slowdown in the shipbuilding industry should ease the infrastructure crunch and

reduce pricing power even for offshore players. New entrants will, over time,

affect pricing and limit margin upside beyond the next couple of years. The

strength of new orders driven by demand growth for oil will slow down if the

global economy cools, a scenario that is currently not factored in.

Customer trading multiples suggest slowing growth aheadThe markets could be mispricing the operators (customers of Keppel and SMM),

but trading at ~11x forward P/E, these stocks seem to suggest slower growth

rates. If the operators face a slowdown in growth it would be only a question oftime before the rig builders see a slowdown as well.

Prefer Keppel on valuations, property exposureWe prefer Keppel to SMM given discounted valuations for its O&M businessversus SMM, and Keppel’s exposure to the Singapore office property market onwhich we are bullish.

Leveraging our European analysts’ analysisIn this note, we have drawn from a research piece entitled Expanding the oil service spectrum dated 25 Sept 2007 by our European analyst Christyan Malek.We believe that some of the analysis, particularly regarding rig day rates and newlicenses, is unique and ground-breaking.

Valuation and riskBased on DDM, we value SMM at S$3.80. We value Keppel based on sum of the

parts at S$14.2. Large orders have been catalysts for these stocks and orders ofS$1bn+ cannot be ruled out. New yards have been encountering problems inexecuting complex projects. This might limit options for customers and allow forincreased pricing power.



28 September 2007 Energy Singapore offshore


Table of Contents

Investment thesis ...............................................................................3 Outlook ............................................................ ..................................................................... ....3 Valuation .......................................................... ..................................................................... ....3 Risks ...................................................... ................................................................ ................... 3

Strong cycle – Then why the caution?..............................................4 Forecasts suggests a slowdown in new rig orders from 2009................. ................................ 5 Stocks will likely correct even if shipbuilding slows down........................................................6 Pull-back/rise of order backlog could determine near-term share price trend....... .................... 7 Multiples of the drill operators (customers of SMM)............................................................... .7

Industry structure and trends .........................................................10 Growth in oil demand.................................................. ............................................................ 10 New discoveries a must as production outpaces new finds................................................... 11 Offshore has been the main contributor to growth ................................................................ 12 Most new exploration will be offshore ............................................................... .................... 13 Key demand drivers ....................................................... ......................................................... 14

FPSO demand could drive next round of growth for Sembcorp............................................. 14 Exploration drilling trends...............................................................15 Shallow water drilling outlook shows mixed signals............................................................... 16 Deepwater drilling outlook appears polarised - activity looks set to rise exponentially with

depth across the medium term........................................................................... .................... 17 DB day rate model ................................................................. ................................................. 21

Competitive positioning ..................................................................23

Risks...................................................................................................24

Keppel Corp Ltd................................................................................25

Sembcorp Marine.............................................................................35





Investment thesis

Outlook

There is an ongoing offshore marine boom and there are no immediate signs of its coolingoff. The boom is due largely to three factors working in concert – 1) tougher environmental

requirements by the International Maritime Organization for the phase-out of single-hull

tankers in 2010, 2) China's hyper-growth economy and an upswing in global trade, and 3) the

need for new offshore exploration and oil production facilities. A slowdown in any one of

these drivers will lead to a correction of offshore marine-related stocks.

Given the complexity of the industry, timing a slowdown or a pick-up is impossible. Our

analysis suggests that for any significant upside from current levels, Keppel and SMM will

continue to deliver double-digit growth beyond 2010. This follows strong earnings growth

through 2005-2010. The downside will be significant even if the markets perceive a

plateau/dip in earnings after 2010.

Our analysis suggests that except for ultra-deep-water rigs, day rates will plateau/dip from

2008 onwards, which could slowdown new order trends and lower order backlog, which is

correlated with the share price performance. The specs for ultra-deep facilities are much

higher, which could be a buffer for any large dips in new order activity.

Both Keppel and SMM have developed a strong foothold in offshore construction services

and are well positioned to benefit from the current cycle. Over time, however, new yards will

spring up and while execution will be an issue, these yards will ease overall capacity

constraints, thus reducing pricing power and returns.

Valuation

Both SMM and Keppel trade at higher multiples than the industry average, with a slightly

higher premium for SMM. The heavy focus on the O&M segment versus the more diversified

revenue base of its Korean peers and Keppel might explain the higher multiples. We value

SMM on a dividend discount methodology, and on a base case basis we value the stock at

S$3.80. We value Keppel on a sum-of-the-parts (SOTP) methodology with a target price of

S$14.2.

Risks

Oil companies are under pressure to find new oil and gas fields to replace the aging ones,

which could drive the current cycle well beyond our expectations.

Large orders have been catalysts for the stock and orders of S$1bn+ cannot be ruled out.New yards have been encountering problems in executing complex projects, which might

limit options for customers and allow for increased pricing power.

The current synchronized strength in shipbuilding and oil facilities could continue much longer

than our expectations and indeed accelerate, especially if oil prices continue to move up.

Much of the offshore fleet rigs are old. If industry players choose to replace rather than

refurbish these, the cycle will gain in strength.

There are plenty of scenarios which suggest that oil prices could continue to double or even

triple from the current levels, and high oil prices are a key risk to our call.





Strong cycle – Then why thecaution?

In our view, the off-shore marine earnings have not peaked but growth will be at a much

slower pace, particularly as we move out beyond 2009/2010. This should warrant a de-rating

in multiples over the next 12 months.

Over the next three years the industry is expected to add over 100 rigs to the current fleet,

and this addition will make an impact on rig numbers. With strong demand, all of the new rigs

coming to market should be absorbed as they leave the shipyards.

But the new rigs entering the fleet will help reduce the overall tightness in the offshore rig

market, thus cooling the day rate inflation seen over the last two years. This could start

slowing things down in terms of new builds or at least new build growth. It is difficult to

predict when the markets will start discounting this. But with the stocks at an all-time high

and oil prices close to the peak, the risks on the downside seem far higher than on the

upside.

Shipbuilding has also been exceedingly strong over the last several years and in some

aspects does pare away offshore building capacity. For example, as per Clarkson research

the forecast oil demand growth does not quite measure up to the expected growth of the

tanker fleet. IEA expects global oil demand to grow 2m b/d. To meet this demand growth the

tanker fleet would need to grow by 16m dwt a year. But based on the current build rollouts, it

is likely to grow by much more than that, even accounting for conversions.

Some of the above arguments could well have been made a year or even two years ago. So

what is different now from a year ago is the key question:

The cycle has been playing out longer and based on historical patterns is close to its

peak. Of course there is every possibility that this cycle will be a much longer cycle,

which is a key risk to our call. But even then, in our view, the share price has run up

enough to warrant a decent correction, particularly if the global economy cools.

2007 and 2008 will be the first year when some new ”real” capacity comes on line.

This could stabilize or move down rig day rates. We forecast a dip in all but the ultra

deep-water segment from 2009.

New entrants have started coming into the business. There will be a learning curve

but the new entrants are likely to cap margin upside.

Signs of push-back by customers on pricing.

Start of speculative build to specs even by conservative operators like Global

Santafe.

Oil prices are significantly above DB’s forecast. If we are right, a correction in oil

prices will hurt the stock.

Order backlog is high at both SMM and Keppel. With a quarterly revenue runrate

(O&M) of S$1.0bn for SMM and S$1.5bn (O&M) for Keppel, the risk of a reversal in

order backlog is much higher now.

Valuations at record levels, while multiples of customers suggest a peaking of the

cycle.





Forecasts suggests a slowdown in new rig orders from 2009

Day-rates have increased substantially, but drilling economics still remain compelling and we

expect to see continued increase in rates in the near term, but at a slower pace.

However, barring the ultra-deep-water category, we expect rates to start flattening/falling

from 2009 onwards. This would suggest that while orders for new build could be high in2009, incremental strength from current levels is unlikely except in the ultra-deep category.

Figure 1: Shallow water rig rate outlook b/w 0m to

199m/656ft


399m/656 to 1300ft

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Lacklustre drilling activity in what is expected to be a readily

accessible Jack-up market will pressure day rates

Source: Deutsche Bank

Robust drilling outlook should at worst help maintain leading

edge Jack-up rates against a backdrop of capacity creep and

high rig liquiditySource: Deutsche Bank

Figure 3: Deepwater rig rate outlook b/w between 400m

to 914m/1300 - 3000 ft

Figure 4: Deepwater rig rate outlook b/w 914m to

1500m/3000-5000ft

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drill ing days day rate

Ramp up of new ultra deepwater rigs that will initially be

utilised in depths <5000ft coupled with an expected declinein drilling activity will pressure day rates (some support

expected from lack of rig liquidity)Source: Deutsche Bank

Moderate increase in drilling activity will help support day

rates despite ramp up of new ultra deepwater rigs that willinitially be utilised in depths <5000ft (additional support

expected from lack of rig liquidity)Source: Deutsche Bank






2290m/5000-7500ft

Figure 6: Deepwater rig rate outlook > 2290m/7500ft

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Lacklustre drilling activity coupled with additional capacity

coming on-stream will pressure day rates; however the lack

of rig liquidity should provide support around $350k/d at least

for the mid termSource: Deutsche Bank

Increase in new ultra deepwater rigs will not be enough to

quench the ramp up in drilling activity expected at these

depths. We expect rig rates to rise further


Stocks will likely correct even if shipbuilding slows down

The strength currently seen by SMM and Keppel is not just due to high offshore oil-related

build. Shipbuilding and ship-repair segments are also very strong. Any weakness on the

shipbuilding activities can free up yard capacity and ease construction resources constraints.

Dock space is fully utilised currently with dock bookings visibility of over three months. Ship-

repair, typically a steady-margin business, has shown an increase in margins due to

continued tightness in global ship-repair capacity. Gross ship-repair margins are now hovering

at 35-40% - almost twice the levels experienced in the last few years.

The barriers to entry in the offshore segment are relatively high, particularly in the more

technology-intensive builds. There will be a learning curve that newcomers must master and

some of them will face losses in their attempts to build offshore rigs and vessels. However

with the economics favourable, many new yards will crop up. Some will no doubt

underestimate the risks in building rigs, but some will, through alliances and technology

partners, succeed.

How long it will take for new competition to come is not clear but they will come and pricing

will then come under pressure. We don’t need increased offshore-related new competition to

come in. Increased shipbuilding capacity by itself will lead to increased competition in the

offshore segment and ease pricing power.

In 2006, China's shipbuilding output reached 14.52 million dwt, which accounted for 19% of

global production. Clarkson projects that with ship orders in hand China currently has about

24% of the global market and will have 30% by 2010. With some of the market share gains

coming from companies capable of doing high-end offshore work the offshore-related

industry is also bound to get affected.

We have incorporated increasing margins for SMM and Keppel in our models as the tight

capacity situation has allowed SMM and Keppel to raise their quotes on the latest projects

awarded. However oil companies will start to push back. One way of lowering total project

cost is by splitting the project execution rather than awarding turnkey projects.





This will require more hands on project management by the oil companies but could

potentially lower costs. We have seen some signs of this where projects have been split up

with Chinese yards doing the hull and Singaporean companies executing the rest of the

project.

Pull-back/rise of order backlog could determine near-term shareprice trend

There is a strong correlation between order backlog and share price performance. With a

quarterly revenue run-rate of ~S$1.0 bn (O&M for SMM) and 1.5bn (O&M for Keppel), a

catalyst for downward pressure on the stock would be two-three quarters with sub S$700-

800m new order wins. On the upside, however, a single block of S$1bn+ order could see the

stock hit new highs.

Figure 7: SMM share price versus order back log Figure 8: Keppel share price versus order back log

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Share price movement

Source: Deutsche Bank, Company announcements Source: Deutsche Bank, Company announcements

Multiples of the drill operators (customers of SMM)

The markets could well be mispricing the operators, but trading at ~11x forward P/E the

stocks seem to suggest slower growth rates for these stocks. The only operator in our below

sample with high earnings multiple is Seadrill.

The major difference between SeaDrill and some of the others in the sample are the number

of rigs and the age of rigs. SeaDrill will get most of its rigs delivered during 2007, 2008 and

2009. The company will also have more exposure in percentage terms to the ultra deep

water market - 4 of 5 rigs available before 2008.

One reason that might explain a low multiple for the operators but high multiples for the rig

manufacturers is that rig manufacturers could move into manufacture of productionplatforms, semis and vessels once the rig demand cools down.





Figure 9: Transocean Rolling P/E Figure 10: Transocean Rolling P/B

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Source: Deutsche Bank, Bloomberg Source: Deutsche Bank, Bloomberg

Figure 11: Diamond offshore rolling P/E Figure 12: Diamond offshore P/B

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Figure 13: Global Santafe rolling P/E Figure 14: Global Santafe rolling P/B

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Figure 15: Seadrill rolling P/E Figure 16: Seadrill rolling P/B

PE

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Industry structure and trends

Global oil and gas consumption has outpaced oil discoveries for over three decades. Sizes of

finds have also plummeted. The only realistic new sources over the next decade now seem

to be the offshore blocks.

The supply squeeze can be augmented by rehabilitating old fields, increased use of natural

gas and refinery processing gains. But the scopes for these are limited and future growth

ultimately will depend on new discoveries.

While supply side dynamics will continue to keep offshore-related spending reasonably high,

the growth in order books from the current high levels will be linked to the strength of the

world economy. A strong world economy is needed to keep up the demand for energy which

keeps oil prices high and oil company profits up. This in turn allows the oil companies to

spend on exploration & development which finally drives demand for offshore units

In our view, over the longer term, the growth in oil demand, the potential shrinkage in knownreserves, high oil prices, and strength of Singapore as an O&M hub should ensure continued

strong demand for semi-submersibles and floating production units for companies in

Singapore. Deepwater drilling given its relatively new advent could potentially provide

significant visibility and therefore relatively stable revenue streams over the next several

years.

Growth in oil demand

The EIA (Energy Information Administration) expects world consumption of petroleum and

other liquid fuels to grow from the current 87m barrels oil equivalent per day to 97m in 2015

and 118 million in 2030 despite high oil prices.

Figure 17: Oil demand growth

71 74 74 76 76 77 78 7982 83 84

90

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Source: Deutsche Bank, ODS Petrodata





New discoveries a must as production outpaces new finds

With onshore oil having peaked, the source of growth in new oil production increase will

have to come from offshore. Offshore drilling efforts should hence accelerate. With the

prevailing high rig utilization rates this is not possible without growth in the drilling rig fleet.

Figure 18:

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1930 1950 1970 1990 2010 203

B i l l i o n b a r r e l s

Discovery Production


While production has been outpacing discoveries, production capacity slack is now at all time

lows. With high oil prices and little excess production capacity the infrastructure build must

continue.

Figure 19: No excess production capacity

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Offshore has been the main contributor to growth

With falling outputs from many of the onshore fields, the new finds and production growth

have over the last few years been entirely from offshore formations.

Figure 20: Offshore continues to increase contribution to total oil output

1997 1987 1997 2007Offshore (millions of barrels/day) 7 18 22 28

Percentage of total crude 10% 30% 33% 39%


With some of the shallow water fields also peaking, the search for new sources is going into

the ocean and into deeper waters.

Figure 21:Signature bonuses kicked off in ‘06; appetite

appears to have accelerated in deepwater

Figure 22: Shift in licensees awarded has historically

followed with a similar (directional) change in drilling days

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Source: Deutsche Bank, Wood McKenzie Source: Wood McKenzie; *measured by drilling days; this is defined as the time drilled between spudding &

completion of well. Beyond actual drilling it will also include time spent on wellhead related operations (surface and

subsurface).

Figure 23: Drilling activity in depths 0-199m Figure 24: Drilling activity in depths 200-399m

20,000

21,000

22,000

23,000

24,000

25,000

26,000

27,000

28,000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 E

2 0 0 8 E

2 0 0 9 E

2 0 1 0 E

d a y s

0

100

200

300

400

500

600

700

800

900

l i c e n s e s

drilling days licenses awarded

decline in licensing

expected to pressure

dril l ing activity

0

1,000

2,000

3,000

4,000

5,000

6,000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 E

2 0 0 8 E

2 0 0 9 E

2 0 1 0 E

d a y s

0

20

40

60

80

100

120

140

160

180

l i c e n s e s

drill ing days licenses awarded

ramp up in licensing

expected to fuel

drilling activity

Source: Deutsche Bank & Wood McKenzie; Source: Deutsche Bank & Wood McKenzie;

Figure 25: Drilling activity in depths 800-1199m* Figure 26: Drilling activity >3200m*

0

500

1000

1500

2000

2500

3000

3500

4000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 E

2 0 0 8 E

2 0 0 9 E

2 0 1 0 E

d a y s

0

2000

4000

6000

8000

10000

12000

14000

16000

l i c e n s e s


After a surge in 2003, licensing at this end o f thedeepwater spectrum nose dived. Inevitably this

shou ld drive a decline in associated activity

0

200

400

600

800

1000

1200

1400

1600

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 E

2 0 0 8 E

2 0 0 9 E

2 0 1 0 E

d a y s

0

50000

100000

150000

200000

250000

l i c e n s e s

dril ling days licenses awarded

YTD data shows an unprecented wave of

licensing in ultra-deepwater, This should

follow equally with a hike in dril l ing activity

Source: Deutsche Bank & Wood McKenzie; Source Deutsche Bank & Wood McKenzie;





Figure 27: Deep water production forecast

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

2 0 0 6

2 0 0 8

2 0 1 0

2 0 1 2

2 0 1 4

( M i l l i o n s o f B b l s o i l e q u i v . p e r d a y )


Most new exploration will be offshore

Deepwater rigs are just a fraction of the entire offshore fleet, despite the industry's move

into deeper and deeper waters. What is certain is that there will be many more rigs and

production platforms that need to be built. The key variables of the future capex profile will

be: 1) how much longer can the existing fleet be refurbished rather than scraped, 2) how long

would it take to replace the fleet, 3) the size of the new fleet needed. 4) oil prices.

Figure 28: Rig aging profile

Competitive Non-competitive

Rig type Number of rigs Age Number of rigs Age

Jackups 355 23 52 25

Semisubs 156 23 12 20

Drillships 35 19 3 17


But we do note that there are still competitive rigs over 40 years old in service. If the industry

can push the service life of the rig to about 35 years versus expectations of 25-30 years the

need for new builds will be slower than what the market currently anticipates.

Figure 29:Age of some old functioning jackups

Schahin Cury Jackup 42

GlobalSantafe Jackup 39

Viking Offshore Semisub


New rig additions might temporarily slow things in about 3 years time

A number of newly built rigs will be joining the offshore rig fleet over the next 3 to 4 years.

The jackup fleet is expected to increase by 70 rigs (20% increase). The semisub fleet is

expected to grow by 43 rigs (28% increase). The drillship fleet is expected to grow by 17 rigs

(49% increase).





Spend on oil sands could affect spend on offshore

After the wave of license acquisitions, (most of which occurred in Canada in 2003-06) Wood

Mackenzie expects project sanctioning to kick off in the latter part of 2008 with the bulk of

Final Investment decision (FID) to take place in 2009/10. While these spending will be far

more strategic in nature increased capex here could limit spending in other exploratory

activities.

Key demand drivers

As with any complex market, there are great many factors that drive demand for rigs. These

can include uncontrollable acts of nature, specific actions taken by governments and

individuals, and ongoing development efforts. Some of the important factors are outlined

below.

Impact of crude oil price on capex

Probably the single most important component in determining rig demand, particularly for

deepwater rigs, is the price of oil. Oil prices have a large impact on semi-submersible

demand and increases or decreases in the price of oil can signal changes in demand for

semisubs.

Consumer’s impact on semisubmersibles

Consumers are an important driver of oil prices, and their demand for gasoline, heating oil,

natural gas, and other petroleum products does much to drive world oil markets and rig

markets, in turn.

Impact of large discoveries' on semisubmersibles

Major discoveries cause demand for semisubmersibles to increase. Large discoveries

typically have a more positive impact on long-term demand.

Governments' impact on semisubmersibles

Governments can most markedly affect demand for semisubs in two ways. The first is

through their land management practices. By leasing more deepwater areas and making

more room for exploration, governments can drive more demands for semisubs.

The second method that governments can employ to affect rig demand is taxation. Raising

taxes obviously makes an area less attractive while the lack of or lowering of taxes can help

to increase exploration.

FPSO demand could drive next round of growth for Sembcorp

Demand growth for FPSO is likely to be solid over the next few years so long as oil prices

remain high. The order sizes will be bigger and could raise margins slightly. However the

sales cycles for these larger projects are likely to be longer as IOCs and NOCs will have to be

extra careful in reviewing the costs and contractual terms.

South Korean and Japanese yards that are the leaders in building gas carriers and floating

production units. Both Keppel and SMM have a strong track record in production platforms

and particularly in FPSO conversions.





Exploration drilling trends

The below is mostly an extract from a research note titled: Expanding the oil service

spectrum dated 25 Sept 2007 published by our European oil services analyst Christyan

Malek.

As host governments take a more strategic view on long-term domestic oil and gas

production National Oil Companies (NOCs) will continue to source more of the drill related

spend. Our European Analyst Christyan Malek thinks that NOCs could source up to 50% of

drilling-related spend by the end of the decade. This should offer drillers servicing NOCs a

relatively safe harbour against fluctuating oil and gas prices.

The impact of more active participation from NOCs will work its way through the oil chain as

host governments place greater emphasis on energy security rather than near-term profits

and take a more structural view to exploratory drilling.

Figure 30: NOCs will play a greater role in drilling

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E

$ m n

32%

34%

36%

38%

40%

42%

44%

46%

48%

Drilling capex (IOC + NOC) % NOC

NOCs withdrew from exploration

driven, in part by lack of appetite

to explo re and monetis e reserves

in a weak macro environment

Source: Deutsche Bank, Wood McKenzie

Christyan Malek’s analysis, done in conjunction with Wood Mackenzie, points to a secular

rise in aggregate drilling days globally, across the medium term spurred by a marked increase

in licenses awarded. In shallow water, we expect drilling activity to remain strong in depths

greater than 200m. Our deep-water outlook appears polarised with activity set to rise

exponentially with depth. Ultra deep-water (>3200m) boasts the highest momentum in

drilling days into the end of the decade.





Figure 31: Medium term Wood Mackenzie expects a secular rise in drilling days

25000

75000

125000

175000

225000

275000

2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E

E x p l o r a t i o n , a p p r a i s a l a n d d e v e l o

p m e n t c a p e x

( $ b n )

75,000

80,000

85,000

90,000

95,000

100,000

d a y s

w el lh ead o per ati on s d ri ll in g sei sm ic ag gr eg at e d ri ll in g d ay s

Rise in glob al capex since 2002

has fuelled drilling activity

globally

Insufficient historic investment in capacity,

with utilisations approaching 100%, placed a

bottleneck on Oil Co's ability to drill

Source: Wood McKenzie

26% of the world’s incremental rig capacity is via refurbishment, conversion and re-activation

of very old and often idle or damaged fleet. Against a backdrop of rising exploration capex,

we believe more economical type of investment will increase helped by longer lead times on

new builds and fears of over capacity in the new build market. However this will reduce

cyclical upside that rig builders will likely see, while at the same time extending the life of the

cycle and raising trough levels.

Shallow water drilling outlook shows mixed signals

In Figures 32 and 33, Christyan Malek shows the different trends in activity depending on the

drilling depth, offshore and onshore. He has also indicated the forecast for rig rates in his

projections through to 2010.

Figure 32: Drilling activity in depths 0-199m Figure 33: Drilling activity in depths 200-399m

20,000

21,000

22,000

23,000

24,000

25,000

26,000

27,000

28,000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 E

2 0 0 8 E

2 0 0 9 E

2 0 1 0 E

d a y s

0

100

200

300

400

500

600

700

800

900

l i c e n s e s


decline in licensing

expected to pressure

dril l ing activity

0

1,000

2,000

3,000

4,000

5,000

6,000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 E

2 0 0 8 E

2 0 0 9 E

2 0 1 0 E

d a y s

0

20

40

60

80

100

120

140

160

180

l i c e n s e s

drill ing days licenses awarded

ramp up in licensing

expected to fuel

drilling activity

Source: Deutsche Bank & Wood McKenzie Source: Deutsche Bank & Wood McKenzie





Deepwater drilling outlook appears polarised - activity looks setto rise exponentially with depth across the medium term

Figure 34: Drilling activity in depths 800-1199m* Figure 35: Drilling activity >3200m*

0

500

1000

1500

2000

2500

3000

3500

4000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 E

2 0 0 8 E

2 0 0 9 E

2 0 1 0 E

d a y s

0

2000

4000

6000

8000

10000

12000

14000

16000

l i c e n s e s


After a surge in 2003, licensing at this end o f the

deepwater spectrum nose dived. Inevitably this

shou ld drive a decline in associated activity

0

200

400

600

800

1000

1200

1400

1600

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 E

2 0 0 8 E

2 0 0 9 E

2 0 1 0 E

d a y s

0

50000

100000

150000

200000

250000

l i c e n s e s

dril ling days licenses awarded

YTD data shows an unprecented wave of

licensing in ultra-deepwater, This should

follow equally with a hike in dril l ing activity

Source: Deutsche Bank & Wood McKenzie; *for completion we have included similar graphs of drilling days

vs. licenses awarded at various intervals between 400m and 800m; 1199m and 3200m

Source Deutsche Bank & Wood McKenzie; *for completion we have included similar graphs of drilling days

vs. licenses awarded at various intervals between 400m and 800m; 1199m and 3200m

Figure 36: Deepwater drilling activity set to intensify in depths > 3200m

0

2000

4000

6000

8000

10000

12000

14000

16000

2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E

D e e

p w a t e r d r i l l i n g d a y s

400-799m 800-1199m 1200-1599m 1600-1999m 2800-3199m 2400-2799m 2800-3199m >3200m

Shift towards ultra deep w ater depths >2800m

Source: Deutsche Bank & Wood McKenzie





Onshore drilling outlook remains buoyant driven, in part by renewed appetite from

NOCs particularly in Middle East and South East Asia

Figure 37: Onshore activity

35,000

40,000

45,000

50,000

55,000

60,000

2

0 0 0

2

0 0 1

2

0 0 2

2

0 0 3

2

0 0 4

2

0 0 5

2

0 0 6

2 0

0 7 E

2 0

0 8 E

2 0

0 9 E

2 0

1 0 E

d a y s

0

500

1000

1500

2000

2500

3000

l i c e n s e s



Below in Figure 38 is the current forecast for new-build rig construction and historical

utilization rate patterns. Figure 39 shows capex projections excluding upgrades,

refurbishments and re-activations.

Figure 38: Capex invested by drillers appears to lag world wide rig utilisations

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

1 9

9 0

1 9

9 1

1 9

9 2

1 9

9 3

1 9

9 4

1 9

9 5

1 9

9 6

1 9

9 7

1 9

9 8

1 9

9 9

2 0

0 0

2 0

0 1

2 0

0 2

2 0

0 3

2 0

0 4

2 0

0 5

2 0

0 6

2 0 0

7 E

2 0 0

8 E

2 0 0

9 E

2 0 1

0 E

$ m n

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

Capex($ mn) Utilisations






The large uptick in spend (based on actual rigs commissioned i.e., ignoring speculative builds)

shown in Figure 39 should not come as a surprise given the unexpected turnaround in

exploration activity. Over time this has led to record-high rig utilizations and day rates and

even forced a temporary decline in drilling activity.

Perhaps more notable is the length of time it has taken drillers to regain the confidence to

invest in new builds despite an upward shift in utilisations since 2003. Figures 39 and 40show actual capex committed to new builds between 2007-09 sourced by region and origin

of the operator i.e., NOC vs. IOC.

Figure 39: Rig new build spend (2007-10E) split by

region

Figure 40: Rig new build spend (2007-10E) split by origin

of operator

Total 2007-10E capex = $42.1 bn

Europe

16%

Middle East

2%

Norway

34%

South America

10%

US

23%

Asia

15%

Total 2007-10E capex = $42.1 bn

National or

government based

operators

35%

IOC based operators

65%

Source: Deutsche Bank Source: Deutsche Bank

On comparing the above to the split of new build spend that occurred between 2003-06, we

note that there has been a large shift from the more traditional investors of rig new builds

such as the US towards Europe and Asia.

In Figure 41, we show the rig capacity that is expected to come onstream both from new

builds and as a result of vessel conversion or upgrades. Most of the refurbished rigs were

either left idle years ago, partially destroyed because of hurricanes or simply retired.

Figure 41: Rigs coming on-stream via upgrades represents 26% of incremental capacity coming on-stream by 2010

Jackups Drillships Semi-submersibles Total

Existing rigs as of start of 2006 360 37 151 548

New builds 2006-10E 77 16 41 134

Refurbishment 2006-10E 12 0 4 16

…of which hurricane refurbishment 2006-10E 5 0 0 5

Reactivations 2006-10E 10 2 15 27

Conversions 2006-10E 2 0 1 3

Sub-total of upgrades 24 2 20 46

Rigs by end of 2010 454 55 208 717

Incremental rig capacity via new-builds 21% 43% 27% 24%

Incremental rig capacity via upgrades* 7% 5% 13% 8%

Source: Deutsche Bank;*Note that many of the refurbished rigs sourced from Middle East have been omitted due to lack of disclosure; we estimate that this could represent an additional 20% of the existing jackup fleet;





Figure 42: Latest ODS figures suggest a 24% increase in

global capacity by the end of the decade

Figure 43: Drillships; 43% increase in supply expected

(depths greater than 7500ft)

0

10

20

30

40

50

60

2007 2008 2009 2010

N u m b e r o f r i g

s

Drillship Jackup Semisubmersible Tenders

137 rigs are currently planned to

come o n-stream across 07-10E

0

1

2

3

4

5

67

8

9

10

11

12

0-2999 3000-4999 5000-7499 7500-9999 >=10000

depth (ft)

N u m b e r o f

r i g s

2007 2008 2009 2010

16 Drillships are planned to come

onstream across 07-10E


Figure 44: Semi-submersibles; 27% increase in supply

expected (bulk occurring at depths >7500ft)

Figure 45: Jackups; 21% increase in supply expected

(bulk occurring at depths b/w 300-400ft)

0

2

4

6

8

10

12

14

16

18

20

0-2999 3000-4999 5000-7499 7500-9999 >=10000

depth (ft)

N u m b e r o f r i g s

2007 2008 2009 2010

41 Semisubmersible rigs are

planned to come onstream

across 07-10E

0

5

10

15

20

25

30

35

40

45

50

55

60

0-199 200-300 300-400 >=400

depth (ft)


2007 2008 2009 2010

77 Jackups rigs are planned to

come on stream across 07-10 E


Rig attrition. Figures 46 and 47 show that 38% of global rig capacity is above 25 years old

(typical expected rig run rate is 30 years, though we have refurbished 40 year old rigs still in

operation). Of the expected 24% increase in global capacity, ODS Petrodata estimates that

up to a third of that could potentially be ‘soaked up’ in replacing older rigs forced to go

offstream over the next 5-10 years.

Figure 46: Majority of world rig fleet is above 20 years

old

Figure 47: Average age of world fleet is remarkably high

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

<5 6-10 11-15 16-20 21-25 >25

Age (yrs)

% o f r i g s w i t h i n a g e r a

n g e

0

20

40

60

80

100

120

1 9 5 8

1 9 6 1

1 9 6 4

1 9 6 7

1 9 7 0

1 9 7 3

1 9 7 6

1 9 7 9

1 9 8 2

1 9 8 5

1 9 8 8

1 9 9 1

1 9 9 4

1 9 9 7

2 0 0 0

2 0 0 3

2 0 0 6

2 0 0 9

R i g s d e l i v e r e d p e r y e a r

Av. age of global fleet = 24 yrs






Longer lead times on new-builds (some yards are now quoting up to four years) has led to

many operators and drillers, particularly in the US opting for refurbishment (basically

upgrading a very old rig with modern day technology), conversion or re-activation.

Interestingly, of the total number of upgraded rigs coming onstream across 2007-10E, 65%

are sourced from the US.

It appears that the US drillers are becoming less inclined to commit to new builds preferringto upgrade its existing fleet, avoiding the risk of over capacity, suffered by many of them in

the previous downcycles. It also means that they are able to exploit the current commodity

environment far quicker and leverage arbitrage opportunities e.g. in cases where there is a

short term vacuum of rigs in a particular region.

This is in contrast to investing in and subsequently contracting out new builds on longer term

rates that are often below the spot rig rate market. However, the day rates they are able to

charge are far less than new rigs.

Rig liquidity. Figures 48 and 49 shows the proportion of new build rigs that are yet to be

contracted.

Figure 48: Jackup new build spare capacity 2007-10E Figure 49: Semi and drillship new build spare capacity

2007-10E

Number of

contracted Jackups,

12%

Number of

uncontracted

Jackups , 88%

Uncontracted semis

and drillships, 33%

Contracted semis

and drillships

67%


DB day rate model

Our European analyst Christyan Malek has modeled short to medium term day rates (by

depth) within the offshore segment. He notes that while the rig market appears well supplied

till the end of the decade, two counter dynamics should neutralise some of the downside risk

on rig utilisations.

Despite the number of deepwater floater new builds coming on-stream, the relative lack of

liquidity here (only c.30% are still accessible) suggests that the market will continue to

remain tight in the medium term – all else being equal. Conversely, the jackup rig market

(offshore and onshore) appears readily accessible. As the new builds come on-stream, we

believe this will inevitably place downward pressure on utlisations, assuming that jackup

demand does not vary significantly from the current levels.

As Figures 50 to 55 show, excess offshore rig capacity (that drove utilisations to <80%)

between 2003-2005 appears to have pressured day rates across all depths despite

intermittent increases in drilling activity during broadly the same time frame. He expects

deepwater day rates to stabilise with downward pressure on depths lower than 3000ft as

drilling activity begins to tail off. In our opinion, the ultra deepwater market (depths> 7500ft)

will perform best. Shallower water day rates will at best remain at current levels.






199m/656ft


399m/656 to 1300ft

20,000

21,000

22,000

23,000

24,000

25,000

26,000

27,000

28,000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 E

2 0 0 8 E

2 0 0 9 E

2 0 1 0 E


0.0

50.0

100.0

150.0

200.0

250.0

D a y r a t e ( ' 0 0 0 $ k

/ d )


0

1,000

2,000

3,000

4,000

5,000

6,000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 E

2 0 0 8 E

2 0 0 9 E

2 0 1 0 E

W M d


0.0

20.0

40.0

60.0

80.0

100.0

120.0140.0

160.0

180.0

200.0

D a y r a t e ( ' 0 0 0 $ k

/ d )


Lacklustre drilling activity in what is expected to be a readily

accessible Jackup market, will pressure day rates


Robust drilling outlook should at least help maintain leading

edge Jackup rates against a backdrop of capacity creep and

high rig liquiditySource: Deutsche Bank & Wood McKenzie

Figure 52: Deepwater rig rate outlook b/w between

400m to 914m/1300 - 3000 ft


1500m/3000-5000ft

1500

1700

1900

2100

2300

2500

2700

2900

3100

3300

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 E

2 0 0 8 E

2 0 0 9 E

2 0 1 0 E


0

50

100

150

200

250

300

350

D a y r a t e ( ' 0 0 0 $ k / d )


5000

5500

6000

6500

7000

7500

8000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 E

2 0 0 8 E

2 0 0 9 E

2 0 1 0 E


0

50

100

150

200

250

300

350

400

D a y r a t e ( ' 0 0 0 $ k / d )


Ramp-up of new ultra deepwater rigs that will initially be

utilised in depths <5000ft coupled with an expected decline

in drilling activity will pressure day rates (some support

expected from lack of rig liquidity)Source: Deutsche Bank & Wood McKenzie

Moderate increase in drilling activity will help support day

rates despite ramp-up of new ultra deepwater rigs that will

initially be utilised in depths <5000ft (additional support

expected from lack of rig liquidity)Source: Deutsche Bank & Wood McKenzie


2290m/5000-7500ft

Figure 55: Deepwater rig rate outlook > 2290m/7500ft

0

200

400

600

8001000

1200

1400

1600

1800

2000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 E

2 0 0 8 E

2 0 0 9 E

2 0 1 0 E


0

100

200

300

400

500

600

D a y r a t e ( ' 0 0 0 $ k / d )


0

200

400

600

800

10001200

1400

1600

1800

2000

2000 2001 2002 2003 2004 2005 2006 2007E2008E2009E2010E

W M d


0

100

200

300

400

500

600

700

D a y r a t e ( ' 0 0 0

$ k / d )


Lacklustre drilling activity coupled with additional capacity

coming onstream will pressure day rates; however the lack of

rig liquidity should provide support around $350k/d at least

for the mid termSource: Deutsche Bank & Wood McKenzie

Increase in new ultra deepwater rigs will not be enough to

take care of the ramp-up in drilling activity expected at these

depths. We expect rig rates to rise further






Competitive positioning

The barriers to entry are relatively high given the size of some projects, need for significant

investments in infrastructure, timelines involved, supply chain logistics, complexity of project

planning, technologies involved, design complexities and modifications that run through the

course of a project. Both Sembcorp Marine and Keppel have shown the ability to leverage on

both their technological skill sets as well as solid project management capabilities.

With a strong order backlog and proven track record of executing small-, medium- and mega-

scale projects, both Keppel Corp and Sembcorp are well positioned to benefit from the

current offshore build growth.

Both companies have a well diversified client base that spreads across IOCs and NOCs.

Given that both rigs and platforms are typically rebuilt with some modifications past

experience in specific projects will help win repeat businesses.

Both companies have solid management that have tided the downturns relatively well whencompared to several players in the past who went bankrupt.

Local government rules with regards to labour provide significant flexibility in terms of

sourcing staff for managerial and engineering functions and skilled labour from foreign

countries. Singapore has one of the fastest approval processes in the world.

Keppel and SMM have dominated the offshore drilling rigs construction segment. The next

area of focus would be vessels and platforms for production. Demand for deep-water floating

production capacity could be strong as new offshore fields are set to come on stream in the

next five years.

Singapore leads in FPSO conversions but lags South Korean and Japanese yards that are the

leaders in building new gas carriers and floating production units.

Both companies suggest that they will be able to gain market share primarily from the

Japanese yards due to better cost structure. Keppel formed a JV with Technip for the

construction of the P-51 and P-52 floating production units (FPU), and is in negotiations with

Petrobras for the P-56 FPU. The company is expected to announce this by the end of the

year. Sembcorp is in negotiations for the P-55 FPU after the project was tendered by only

SMM.

The acquisition of SMOE and SemBeth allows SMM to expand into the offshore production

segment. The company also has access to a network of yards in Singapore, Indonesia, the

US, Gulf and Brazil. SMM can also leverage on the lower-cost ship repair yards under Cosco

Corporation. Keppel also has the ability to leverage and optimize on its facilities andoperations from about 20 yards spread across various countries including the US, Rotterdam

and China.





Risks

Oil companies are under pressure to find new oil and gas fields to replace their aging fields,

which could drive the current cycle well beyond our expectations.

Large orders have been catalysts for the stock and orders of S$1bn+ cannot be ruled out.

New yards have been having problems in executing complex projects. This might limit

options for customers, and allow for increased pricing power. Another near-term risk if there

is any announcements of acquisition of new yards.

The current synchronized strength in shipbuilding and oil facilities can continue much longer

than we have expected and indeed accelerate especially if oil prices continue to move up.

Much of the offshore fleet rigs are old. If the industry players chose to replace rather than

refurbish these the cycle will get added strength.

There are plenty of scenarios which suggest that oil prices can double or even treble from the

current levels and high oil prices will be a key risk to our call especially if the prices aresteadily high.

Higher oil prices are supposed to spur Ethanol and bio-diesel, but with commodity prices of

agricultural products also high, the cross over to biofuels may not be of any significant size to

make any material impact on oil prices. However increased conservation and slower than

expected oil demand growth can reverse oil price rises in favour of our call.

Oil prices seem relatively high but at US$0.10 a cup remains a cheap liquid. As a commodity,

oil prices typically revert to the marginal cost of production. But with a strong global

economy, and OPEC managing to control output, marginal demand rather than the marginal

cost of supply seem to be driving prices. This scenario could extend longer than expected.

A strong world economy has been driving the demand for energy especially oil and gas.

Continued strong global economic expansion will increase exploration and development

contracts.

The current fleet of offshore jackup rigs are old. The lives can be extended by

refurbishments. Some rigs as old as 42years are still in operation. Decisions to replace (which

gives better day rates) versus refurbish which provides a lower risk alternative could see

stronger and longer-than-expected growth

The increased influence of National oil companies (NOCs) can again lengthen the cycle as

NOCs take far more strategic views on investments than IOCs.





Asia Singapore Conglomerates

28 September 2007

Keppel Corp LtdReuters: KPLM.SI Bloomberg: KEP SP

Riding the offshore wave;

downgrade to HoldPyari Madhava MenonResearch Analyst

(+65) 6423 5546

[email protected]

All engines firing but fully priced into our valuation

A strong order backlog in the offshore segment, strength in the office propertymarkets, strong refining rates and the turnaround of the Infrastructure divisionbode well for Keppel. However, at current valuations we see little upside in thestock and hence downgrade Keppel from Buy to Hold. We lower our TP toS$14.2. This note marks the transfer of coverage to Pyari Menon from GregoryLui

Mega orders could spell visibility beyond 2010Offshore & Marine visibility extends beyond 2010. The company expects thecurrent order momentum to continue, but given that some of the orders might belarge, decision cycles may be longer and there could be delays in announcement.The company indicates that it is now choosy about contracts given the tightsupply and suggests that margins will trend up over the next few years.

Robust office property environment should benefit KeppelOur property analyst Greg Lui is bullish on Singapore office rental activity and

believes that Keppel Land has the highest leverage to rising office values. SPCshould continue to benefit from a shortage in refining capacity. The infrastructuredivision seems set to show continued improvements with focus on the waste toenergy, waste water treatment and energy sectors.

SOTP-based TP of S$14.2 (raised from S$15.3 previously)Our SOTP valuation yields a fair value of S$14.2. On the upside announcementsof mega orders are typically near-term catalyst. Rising oil prices are anotherupside risk. A slowdown in the offshore segment, execution problems andcontract litigation are downside risks.

Forecasts and ratios

Year End Dec 31 2005A 2006A 2007E 2008E 2009E

Sales (SGDm) 5,688.4 7,600.9 9,340.0 9,460.1 10,160.0

EBITDA (SGDm) 594.9 925.1 1,337.9 1,542.2 1,668.0Reported NPAT (SGDm) 563.7 750.8 1,021.8 1,125.7 1,243.2

Reported EPS FD (SGD) 0.36 0.48 0.65 0.71 0.79

DB EPS FD (SGD) 0.36 0.47 0.65 0.71 0.79

OLD DB EPS FD (SGD) 0.36 0.47 0.65 0.72 0.80

% Change 0.0% 0.0% -0.2% -0.6% -0.9%

DB EPS growth (%) 19.3 31.6 37.6 10.1 10.4

PER (x) 16.0 15.8 21.3 19.3 17.5

EV/EBITDA (x) 8.9 7.0 11.9 10.0 8.8

DPS (net) (SGD) 0.09 0.11 0.12 0.12 0.12

ield (net) (%) 1.6 1.5 0.8 0.9 0.9Source: Deutsche Bank estimates, company data

1 DB EPS is fully diluted and excludes non-recurring items2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the

year end close

HoldPrice at 20 Sep 2007 (SGD) 14.00

Price target - 12mth (SGD) 14.20

52-week range (SGD) 14.00 - 7.20

ST Index 3,625

Key changes Rating Buy to Hold

Price target 15.30 to 14.20 -7.2%

Net profit (FYE) 1,024.1 to 1,021.8 -0.2%

Price/price relative

0

50

100

150

200

9 / 0 5

1 2 / 0 5

3 / 0 6

6 / 0 6

9 / 0 6

1 2 / 0 6

3 / 0 7

6 / 0 7

0

5

10

15

20

Rel. to ST Index (L.H. Scale)

Keppel Corp Ltd (R.H. Scale)

Performance (%) 1m 3m 12m

Absolute 11.1 13.8 90.5

ST Index 7.6 2.8 43.5

Stock data

Market cap (SGDm) 22,118

Market cap (USDm) 14,729

Shares outstanding (m) 1,579.8

Major shareholders Temasek (31.86%)

Free float (%) 68

Avg daily value traded (USDm) 51.4

Key indicators (FY1)ROE (%) 22.1

Net debt/equity (%) 10.8

Book value/share (SGD) 3.19

Price/book (x) 4.3

Net interest cover (x) 25.2

Operating profit margin (%) 11.8




Model updated:21 September 2007

Singapore

Reuters Code KPLM.SI

Price as of 26 Sep 07 SGD 14.00

Price Target SGD 14.20

Web Site

http://www.kepcorp.com

Keppel Corporation Limited's core businesses are offshoreand marine, infrastructure, financial services, propertyinvestment and development, telecommunications andtransportation, energy, and engineering.

+65 6837 5989 [email protected]

Absolute Price Return 1m 3m 12m

1 1. 1% 1 3. 8% 9 0. 5%

52-week Range SGD 7.30 - 14.00

Market Cap SGD 22,118 m

USD 14,775 m

Company IdentifiersBloomberg KEP SP

Cusip –

SEDOL B1VQ5C0

Source: Deutsche Bank estimates, company data

DB EPS (SGD) 0.23 0.26 0.30 0.36 0.47 0.65 0.71 0.79

Reported EPS (SGD) 0.23 0.26 0.30 0.36 0.48 0.65 0.71 0.79

DPS (SGD) 0.07 0.08 0.08 0.09 0.11 0.12 0.12 0.12

BVPS (SGD) 1.8 1.9 2.0 2.3 2.7 3.2 3.8 4.5

Weighted average shares (m) 1,536 1,545 1,552 1,558 1,569 1,580 1,580 1,580

Average market cap (SGDm) 3,078 3,651 5,634 8,941 11,678 22,118 22,118 22,118

Enterprise value (SGDm) 2,378 1,646 3,392 5,314 6,481 16,236 15,681 14,982

P/E (DB) (x) 8.6 9.2 12.1 16.0 15.8 21.6 19.6 17.7

P/E (Reported) (x) 8.5 9.1 12.1 16.0 15.6 21.6 19.6 17.7

P/BV (x) 0.99 1.54 2.09 2.31 3.31 4.38 3.70 3.15

FCF Yield (%) 25.1 14.4 11.7 15.8 16.7 3.7 4.0 4.8Dividend Yield (%) 3.5 3.2 2.2 1.6 1.5 0.8 0.9 0.9

EV/Sales (x) 0.4 0.3 0.9 0.9 0.9 1.7 1.7 1.5

EV/EBITDA (x) 4.1 2.3 5.8 8.9 7.0 12.1 10.2 9.0

EV/EBIT (x) 6.0 3.3 8.4 11.5 8.1 14.7 12.0 10.4

Sales revenue 5,528 5,947 3,963 5,688 7,601 9,340 9,460 10,160

Gross profit 579 719 584 595 925 1,338 1,542 1,668

EBITDA 579 719 584 595 925 1,338 1,542 1,668

Depreciation 184 221 178 130 125 231 231 231

Amortisation 2 2 2 2 2 2 2 2

EBIT 393 496 404 463 798 1,105 1,309 1,435

Net interest income(expense) -32 -38 -18 37 17 -44 -51 -33

Associates/affiliates 74 84 253 322 315 301 277 284

Exceptionals/extraordinaries -21 -14 -1 2 7 0 0 0

Other pre-tax income/(expense) 75 15 5 5 10 17 23 31

Profit before tax 490 543 644 828 1,147 1,379 1,558 1,716

Income tax expense 83 63 91 153 257 228 270 290

Minorities 48 82 89 111 139 129 162 183

Other post-tax income/(expense) 0 0 0 0 0 0 0 0

Net profit 358 398 464 564 751 1,022 1,126 1,243

DB adjustments (including dilution) 0 0 4 1 -4 3 3 3

DB Net profit 359 398 468 565 746 1,025 1,129 1,246

Cash flow from operations 574 516 570 1,795 2,205 1,119 1,195 1,361

Net Capex 198 11 91 -382 -253 -300 -300 -300

Free cash flow 772 527 661 1,412 1,952 819 895 1,061

Equity raised/(bought back) 11 14 10 19 0 0 0 0

Dividends paid -164 -136 -146 -229 -248 -253 -263 -263

Net inc/(dec) in borrowings -557 -916 -89 31 -774 -461 -300 -300

Other investing/financing cash flows 190 550 32 -1,025 66 -100 -100 -100

Net cash flow 252 38 469 209 995 4 233 398

Change in working capital -1 -146 -41 1,069 1,147 67 -88 -33

Cash and other liquid assets 815 748 973 1,411 1,619 1,789 2,031 2,429

Tangible fixed assets 2,578 1,705 1,399 1,653 1,741 1,810 1,879 1,948

Goodwill/intangible assets 141 147 125 145 135 0 0 0

Associates/investments 5,744 6,114 6,134 7,236 7,928 8,084 8,228 8,374

Other assets 2,198 1,369 1,874 2,145 2,394 3,133 3,528 4,051

Total assets 11,476 10,083 10,505 12,589 13,816 14,817 15,665 16,802

Interest bearing debt 4,705 3,788 3,699 3,731 2,957 2,496 2,196 1,896

Other liabilities 2,899 2,335 2,550 3,924 5,261 5,780 5,864 6,102

Total liabilities 7,603 6,124 6,249 7,655 8,219 8,276 8,060 7,998

Shareholders' equity 2,718 2,890 3,090 3,646 4,205 5,045 5,980 7,033

Minorities 1,155 1,070 1,166 1,289 1,393 1,496 1,625 1,771

Total shareholders' equity 3,872 3,959 4,256 4,935 5,598 6,541 7,605 8,804

Net debt 3,890 3,040 2,726 2,320 1,339 707 165 -533

Sales growth (%) NM 7.6 -33.4 43.5 33.6 22.9 1.3 7.4

DB EPS growth (%) – 10.2 17.1 19.3 31.6 37.6 10.1 10.4

EBITDA Margin (%) 10.5 12.1 14.7 10.5 12.2 14.3 16.3 16.4

EBIT Margin (%) 7.1 8.3 10.2 8.1 10.5 11.8 13.8 14.1

Payout ratio (%) 30.1 29.1 26.7 25.4 23.4 17.8 16.9 15.3

ROE (%) 13.6 14.3 15.6 16.8 19.2 22.2 20.5 19.2

Capex/sales (%) 2.4 1.7 3.0 8.0 5.7 3.2 3.2 3.0

Capex/depreciation (x) 0.7 0.5 0.7 3.4 3.4 1.3 1.3 1.3

Net debt/equity (%) 100.5 76.8 64.1 47.0 23.9 10.8 2.2 -6.1

Net interest cover (x) 12.5 13.1 22.4 NM NM 25.2 25.5 43.0





Valuations

Our sum-of-the-parts valuation yields a fair value of S$14.2. This is lower than the S$15.3 we

had before. The lower target price is primarily because we peg our offshore marine division’s

fair value at SMM’s TP multiples rather than SMM trading multiples.

Figure 56: Sum of the parts valuationDivision Value of Keppel’s

Holding (S$m)

Keppel's

share

Value per

share S$

Comments

Offshore & Marine

11,682 100% 7.4

At 16.5x FY08 O&M estimates, which are in line with SMM's 2008 target price multiple.

We believe that the business profile, growth rates and risks of SMM are very similar to

Keppel's offshore marine business

Infrastructure

887 100% 0.56

At 2x cost of investment ex KT&T, which we value separately. We believe that Keppel has

bought some of its assets in this portfolio at distressed sales prices and a 2x multiple is

warranted. The division has also historically made losses and hence its book has eroded,

which is perhaps understated. With the Qatar Waste-to-energy project likely to start

contributing from 4Q, the division is well into a turnaround phase.

Property - Keppel Land 4,033 53% 2.6 Based on S$10.6 target price

Keppel Harbour 1,707 70% 1.08 Based on unrealized value of S$730mInvestments

KREIT 189 31% 0.12 Based on market cap of K-REIT

K1 Venture 238 38% 0.15 Based on market cap of K1 Venture

Keppel T&T 1,938 81% 1.23 Based on current market cap of KTT

SPC 1,463 45% 0.93 Based on current market cap of SPC

Others 358 100% 0.23 Based on 1.5x cost

Total value 22,496 14.2Source: Deutsche Bank, Bloomberg

Relative valuations

Keppel trades almost in line with the industry average.

Figure 57: Relative valuations

PE PB EV/Sales

EV/EBITDA

ROE

Name Ticker, Price, Rec 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008

Hyundai Heavy 009540 KS

W439,000, Buy 10 23 16 2.1 6.3 4.8 0.4 1.7 1.5 3.6 11.3 8.4 17% 30% 33%

Keppel corp KEP SP, S$14.0,

Hold 16 22 19 3.3 4.4 3.7 0.9 1.5 1.4 7.0 10.8 8.8 19% 22% 21%

Daewoo Shipbldg 042660 KS,

W57,900, Buy 92 26 11 3.5 5.7 3.9 0.8 1.3 1.0 NM 17.8 7.4 4% 24% 41%

Samsung Heavy 010140 KS,

W47,000, Buy 34 23 15 2.3 4.4 3.5 0.3 0.9 0.7 5.5 9.8 5.8 7% 20% 27%

Namura Shipbldg 7014 JP, JPY1,670,

NR 25 24 15 7.6 2.6 2.6 0.3 0.4 0.3 8.9 4.4 NA 35% 38% 41%

Labroy Marine LBRY SP, S$2.47,NR 21 17 14 0.4 5.2 4.1 2.5 1.8 1.4 14.8 10.8 9.0 26% 34% 33%

COSCO COS SP, S$5.55, NR 25 40 27 7.6 12.8 9.5 4.5 5.9 3.5 15.4 22.7 14.5 35% 38% 41%

LAMPRELL PLC LAM LN, GBP380,

Buy 22 24 17 10.5 10.9 7.8 2.2 3.5 2.9 11.9 17.4 14.3 41% 57% 53%

EZRA EZRA SP, S$6.3, NR 12 25 15 4.1 5.5 4.2 8.1 10.4 6.3 34.3 23.9 11.8 38% 27% 39%

JAYA JAYA SP, S$1.95,

NR 9 11 11 3.2 3.6 3.4 3.4 4.4 3.8 8.6 11.9 7.8 37% 35% 33%

Bharthi Shipyard BHSL IN, Rs588, NR 17 11 16 4.8 3.2 3.0 3.6 2.6 2.2 16.5 7.2 7.2 32% 34% 29%

Sembcorp SMM SP, S$4.60,

Sell 21 26 20 3.6 5.5 4.8 1.4 2.0 1.7 16.5 21.7 15.8 20% 23% 26%

Average 25.8 22.4 16.6 4.4 5.4 4.3 2.4 3.0 2.2 14.0 15.0 10.8 25% 30% 33%Source: Deutsche Bank, Bloomberg; forecasts for non-rated stocks from I/B/E/S





Historical valuation multiples

Keppel is trading at peak P/B multiples and peak P/E multiples of the current cycle.

Figure 58: Rolling P/B Figure 59: Rolling P/E

0.00

0.50

1.00

1.50

2.00

2.50

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3.50

4.00

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Financials

Assets

The group’s investments in properties and development properties form part of its assets.Investments in associates and other receivables constituted 28% of total assets. Fixed

assets account for 13% of total assets made up of land and buildings, vessels and floating

docks, and plants and machinery.

Figure 60: Asset breakdown

13%

16%

21%

17%

2%1% 1% 1%

2%

11%

3%

12%12%

15%

19%

17%

2%

4%

0%1%

2%

13%

3%

12%

0%

5%

10%

15%

20%

25%

F i x e d

a s s e t s

I n v e s t m e n t

p r o p e r t i e s

D e v e l o p m e n t

p r o p e r t i e s

A s s o c i a t e s

I n v e s t m e n t s

L o a n s

r e c e i v a b l e

I n t a n g i b l e

a s s e t s

S t o c k

A c c o c i a t e s

D e b t o r s

S h o r t t e r m

i n v e s t m e n t s

C a s h

2006 2007

Source: Deutsche Bank, Company data

Capex

Capital expenditure during FY 2006 was S$430.348m, of which, over 50% went to theinfrastructure business and nearly 40% to the offshore and marine business. We expect the

group to spend about S$300m a year over the next few years.

Revenue

Keppel’s revenue grew at a CAGR of 11% from $2.4bn in 1995 to $7.6bn in 2006. However,

growth was moderate at a CAGR of 3.4% between 2000 and 2006. We expect a revenue

CAGR of 10% in 2006-2009F.

The company’s major businesses include 1) offshore rig building, repair and upgrade;

shipbuilding and ship repair and ship conversion, 2) environmental and network engineering;

power generation and logistics, 3) property development and property fund management,

and 4) investments.

Nearly 60% of the revenue comes from the offshore and marine business, which is going to

continue being the major source of revenue for the group. Figure 61 shows the break-up of

Keppel’s various revenue sources.





Figure 61: Segmental break-up

58%

9%

15%18%

67%

9%

16%

8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Offshore & Marine Inf rastructure Property Investment

2006 2007

Source: Deutsche Bank, company reports

We expect that given Keppel’s market leadership in rig building, execution capability, vast

global network of yards and long-term relationship with customers, it will continue to receive

the majority of new orders.

Margins

We expect Keppel’s margins to start improving from the current financial year given a slower

capex profile, more complex builds, tight refining capacity and substantial efficiency gains

from the experiences of the earlier builds. Figure 62 summarizes Keppel’s margin trends.

Figure 62: Margin trends

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2000 2001 2002 2003 2004 2005 2006 2007F 2008F 2009FEBITDA EBIT PAT






Returns

We expect returns to climb over the next few years on increased margins. ROE should

decline slightly in 2008 and 2009 mainly due to a lower leverage forecast.

Figure 63: Return trend

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2000 2001 2002 2003 2004 2005 2006 2007F 2008F 2009F

ROE excl. extraordinaries ROA ROIC


Gearing

Figure 64 shows Keppel’s gearing position. We expect the company to remain in a net cash

position from FY 2008

Figure 64: Net debt to equity

Net Debt to Equity

95.4%

113.1%

103.6%

79.2%

65.7%

47.4%

23.9%

10.8%

2.2%

-6.1% -7.6%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

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2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0






Working capital days

Keppel’s working capital days have been quite low and steady. We have maintained flat

working capital day assumptions in our forecast numbers.

Figure 65: Working capital days

21

36

33

15

3937

16 16 16 16 16

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Debtors day s Creditors day s Inventory day s NW C


Keppel had been generating positive free cash flow since FY 2002 and maintaining a high

cash balance.





Operations

Offshore Marine

We expect Keppel to receive additional jack-up, drill-ship, semi-submersible and large FPSOorders over the next few years. Offshore & Marine enjoys a strong order book stretching to

2010 with management confirming the trend of progressive margin expansion over the next

few years. In our view, however, given a revenue run rate of over S$1.5bn a quarter, order

backlog slippage is likely in some quarters especially if the orders become larger

1H07 order was slow but the company indicates that this was partly because they were

being choosy about the nature of the work they were to undertake. We also note that Keppel

was expecting the P-56 contract. This order has been pushed back but the company remains

confident of landing the contact by the end of this year.

A Keppel-led consortium is currently in negotiations with Petrobras for the P-56 semi-

submersible production unit which has a design similar to the P-51 under construction byKeppel in partnership with Technip. Keppel should enjoy cost efficiencies on the back of

improved learning curve effects if this contract is won.

We expect O&M net margins to expand over the next few years due to improved operating

leverage and scale.

Property

Gregory Lui remains bullish on the Singapore office property sector. Specific to Keppel’s

booking from Reflections, and development earnings from ongoing projects such as Park

Infinia should drive earnings. Launches targeted over the next 6-12 months include The

Tresor, Naga Court and Marina Bay Residences Ph 2.

We expect to continue seeing a broadening of the overseas earnings base as contribution

from newer markets such as India and Vietnam and from the China townships picks up.

These factors should help compensate for the lower contribution from The Seasons which is

nearing completion and slow progress of the launch of 8 Park Ave. Infrastructure

Keppel expects its Infrastructure division to be a growth engine over the next few years after

turning around in 2007F. The company continues to target the division to contribute 10% of

group net earnings. The division is now focused on waste-to-energy projects, waste water

treatment and the energy sector.

Keppel has a 500MW power project in Jurong Island. The Keppel Merlimau Cogen (KMC)

project will also be able to provide utilities like steam, firefighting water, cooling water and

pipe corridor services to existing and potential consumers on Jurong Island. Keppel has

secured a gas purchase agreement with Petronas for up to 120 billion British Thermal Units a

day of natural gas. Keppel also has power barges that will supply electricity to Ecuador for

the next 15 years.

Keppel has a S$1.7B contract to design, build and operate an integrated waste management

facility for Qatar. This project could start contributing some revenue and profit in 4Q07. The

division continues to pursue projects in China, the Middle East and Europe.





Keppel has a “design, build, own and operate contract” for a 148,000 cubic meter NEWater

plant. At capacity, the plant will produce approximately 8% of daily water consumption in

Singapore.

Holding structure

Figure 66: Holding structure

Keppel Corp Ltd

Offshore & Marine Property Infrastructure Investments

100% Keppel Offshore

& Marine Ltd

100% Keppel FELS

Ltd

100% Keppel

Shipyard Ltd

100% Keppel

Singmarine Ltd

100% Keppel

Nantong Shipyard

Company Limited

100% Offshore Technology

Development Pte Ltd

100% Deepwater

Technology

Group Pte Ltd

100% Marine TechnologyDevelopment Pte Ltd

100% Keppel AmFELS Inc

USA

100% Keppel Verolme BV

The Netherlands

100% Keppel FELS

Brasil SA

45% Singapore

Petroleum

Company Ltd

38%

k1 Ventures Limited

17%* MobileOne

Ltd

* Owned by Keppel

Telecommunications &

Transportation Ltd, an

81%-owned subsidiary

of the Company

100% Keppel Bay Pte Ltd

53% Keppel Land Limited

72% K-REIT Asia

100% Keppel LandInternational Limited

100% K-REIT Asia

Management Limited

100% Alpha Investment

Partners Ltd

71% Evergro Properties Ltd

Singapore/China

45% Keppel Thai Properties

Public Co Ltd

Thailand

74% Keppel Philippines

Properties Inc

The Philippines

Environmental

Engineering

Power

Generation Network

Engineering

& Logistics100% Keppel

Integrated

Engineering Ltd

100% Keppel

Seghers Engineering

SingaporePte Ltd

100% Keppel Seghers

NEWater

Development

Co PteLtd

100% Keppel Seghers

Belgium NV

Belgium

100% Keppel FMO

Pte Ltd

100% Keppel

Energy Pte Ltd

100% Keppel

Merlimau

Cogen Pte Ltd

100% Keppel

Electric Pte Ltd

100% Corporacion

Electrica

Nicaraguense SA

100% Termoguayas

Generation SA

81% Keppel

T&T & Ltd

55% TrisilcoFolec SdnBhd

100% Keppel

Logistics

Pte Ltd

70% Keppel

Logistics

(Foshan) Ltd

100% Keppel Norway

AS

Norway

81% Keppel

Philippines

Marine Inc

53% Caspian

ShipyardCompany Ltd

33% Arab Heavy

Industries

PJSC

50% Keppel

Kazakhstan LLP

70%

31%

24%

50%






Asia Singapore Transportation Marine

28 September 2007

Sembcorp MarineReuters: SCMN.SI Bloomberg: SMM SP

Momentum drivers could stall;

initiate with a SellPyari Madhava MenonResearch Analyst

(+65) 6423 5546

[email protected]

Christyan MalekResearch Analyst

(+44) 20 754-58249

[email protected]

Order backlog momentum could reverse, little margin of safety in valuations

Valuations price in strong growth beyond even 2010, implying very little margin ofsafety. The order backlog is high but with a S$1.3bn quarterly revenue run rate,the backlog growth momentum could reverse. With oil prices also significantlyhigher than our forecast (US$62), we initiate with a Sell rating.

New rigs coming online should ease capacity tightnessOver the next three years, the industry will likely add over 100 rigs to the currentfleet. The new rigs entering the fleet will help reduce the overall tightness in theoffshore rig market, cooling the day rate inflation particularly beyond 2009. Thiswill slow things down in terms of new builds or at least new build growth.

Shifts in supply- and demand-side dynamics could lead to a correctionThe current strength in the stock price is backed by forecasts of significant marginand return expansion on pricing and efficiency gains over the next 2/3 years.Easing of the current infrastructure squeeze, any execution delays and newentrants could affect pricing and limit margin upside.

Valuation based on a DDM methodology; TP of S$3.80Our dividend discount valuation yields a TP of S$3.80. Key risks to our call:Sembcorp Marine’s (SMM) fundamentals remaining solid and SMM being wellpositioned to benefit from the industry uptrend. Our concerns arise from themarket’s overenthusiasm about the duration of the current cycle. Typically,valuations alone are not sufficient for a stock correction.

Forecasts and ratios

Year End Dec 31 2005A 2006A 2007E 2008E 2009E

Sales (SGDm) 2,119.3 3,545.0 4,437.5 5,436.1 5,765.5

EBITDA (SGDm) 162.5 296.9 416.9 570.6 639.2

Reported NPAT (SGDm) 121.4 238.4 357.2 471.3 547.8Reported EPS FD(SGD) 0.06 0.11 0.17 0.23 0.27

DB EPS FD(SGD) 0.06 0.11 0.17 0.23 0.27

DB EPS growth (%) 24.0 94.6 50.8 32.0 16.2

PER (x) 39.6 27.4 26.0 19.7 16.9

EV/EBITDA (x) 26.3 19.7 20.1 14.5 12.7

DPS (net) (SGD) 0.12 0.16 0.09 0.11 0.13

ield (net) (%) 5.1 5.1 1.9 2.6 3.0Source: Deutsche Bank estimates, company data

1 DB EPS is fully diluted and excludes non-recurring items2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the

year end close

SellPrice at 26 Sep 2007 (SGD) 4.60

Price target - 12mth (SGD) 3.80

52-week range (SGD) 6.05 - 3.22

ST Index 3,625

0

10

20

30

40

50

60

2007 2008 2009 2010 2011


Dri l lship Jackup Semisubmersible Tenders

147 rigs are currently planned t o

come on-stream across 07-11E

Stock dataMarket cap (SGDm) 9,523

Market cap (USDm) 6,342

Shares outstanding (m) 2,050.5

Major shareholders Sembcorp Industries (62.3%)

Free float (%) 38

Avg daily value traded (USDm) 21.5

Key indicators (FY1)ROE (%) 23.7

Net debt/equity (%) -11.9

Book value/share (SGD) 0.82

Price/book (x) 5.5

Net interest cover (x) 26.1

Operating profit margin (%) 8.1





Model updated:25 September 2007

Singapore

Reuters Code SCMN.SI

Price as of 26 Sep 07 SGD 4.60

Price Target SGD 3.80Web Site

http://www.sembcorpmarine.com.sg

SembCorp Marine is a leading marine engineering companyin Asia. Its activities include ship repair, ship building, shipconversion, rig building, and offshore engineering.

+ (65) 6423 5546 [email protected]

Absolute Price Return 1m 3m 12m

1 8. 2% 3 3. 1% 9 7. 5%

52-week Range SGD 2.30 - 4.60

Market Cap SGD 9,523 m

USD 6,361 m

Company Identifiers

Bloomberg SMM SP

Cusip – SEDOL 6205133

Source: Deutsche Bank estimates, company data

DB EPS (SGD) 0.04 0.04 0.05 0.06 0.11 0.17 0.23 0.27

Reported EPS (SGD) 0.05 0.04 0.05 0.06 0.11 0.17 0.23 0.27

DPS (SGD) 0.07 0.05 0.10 0.12 0.16 0.09 0.11 0.13

BVPS (SGD) 0.5 0.5 0.5 0.5 0.7 0.8 0.9 1.1

Weighted average shares (m) 1,994 2,002 2,007 2,023 2,040 2,050 2,050 2,050

Average market cap (SGDm) 1,370 1,385 1,458 3,378 4,590 9,523 9,523 9,523

Enterprise value (SGDm) 1,161 1,238 1,085 2,927 3,999 8,601 8,481 8,327

P/E (DB) (x) 16.1 18.0 15.3 28.3 19.6 26.6 20.1 17.3

P/E (Reported) (x) 14.9 17.7 15.8 28.3 19.6 26.6 20.1 17.3

P/BV (x) 1.37 1.53 2.01 3.74 3.70 5.63 4.94 4.32

FCF Yield (%) 13.4 2.0 12.8 4.9 NM 3.8 3.8 4.6

Dividend Yield (%) 9.5 7.2 13.8 7.2 7.1 1.9 2.5 2.9

EV/Sales (x) 1.1 1.2 0.8 1.4 1.1 1.9 1.6 1.4

EV/EBITDA (x) 9.0 11.0 8.8 18.0 13.5 20.6 14.9 13.0

EV/EBIT (x) 12.9 16.7 11.7 23.5 17.5 23.9 16.6 14.6

Sales revenue 1,012 1,068 1,363 2,119 3,545 4,438 5,436 5,765

Gross profit 166 143 150 207 364 450 638 727

EBITDA 129 113 124 163 297 417 571 639

Depreciation 39 38 31 38 69 57 59 68

Amortisation 0 0 0 0 0 0 0 0

EBIT 90 74 93 125 228 359 512 571

Net interest income(expense) 0 0 -1 -5 -11 -14 -13 -11

Associates/affiliates 6 8 12 20 44 66 60 80

Exceptionals/extraordinaries 7 1 -3 0 0 0 0 0

Other pre-tax income/(expense) 14 12 11 21 49 21 16 28

Profit before tax 116 95 112 160 311 433 575 668

Income tax expense 23 17 16 34 62 72 103 120

Minorities 1 0 4 4 10 4 0 0

Other post-tax income/(expense) 0 0 0 0 0 0 0 0

Net profit 92 79 93 121 238 357 471 548

DB adjustments (including dilution) -7 -1 3 0 0 0 0 0

DB Net profit 85 77 96 121 238 357 471 548

Cash flow from operations 194 60 218 303 -101 461 460 532

Net Capex -10 -32 -31 -137 -123 -99 -100 -100

Free cash flow 184 27 187 166 -223 362 360 432

Equity raised/(bought back) 6 4 19 32 20 10 0 0

Dividends paid -71 -72 -57 -99 -124 -179 -236 -274

Net inc/(dec) in borrowings 0 66 49 0 231 -17 -80 0

Other investing/financing cash flows -65 14 123 -37 57 -103 -58 -76

Net cash flow 53 39 321 62 -38 73 -13 81

Change in working capital 81 -22 96 143 -364 100 -17 -12

Cash and other liquid assets 162 203 469 531 503 577 564 646

Tangible fixed assets 448 453 460 580 679 720 761 793

Goodwill/intangible assets 2 4 4 4 14 14 14 14

Associates/investments 194 130 91 202 510 753 813 893

Other assets 682 736 835 1,010 1,723 2,127 2,077 1,770

Total assets 1,489 1,525 1,859 2,326 3,430 4,191 4,229 4,115

Interest bearing debt 28 101 150 150 391 374 294 294

Other liabilities 511 482 707 1,061 1,668 2,109 1,985 1,590

Total liabilities 538 583 857 1,210 2,059 2,482 2,279 1,883

Shareholders' equity 940 927 969 1,066 1,338 1,674 1,910 2,184

Minorities 10 15 34 50 32 34 41 48

Total shareholders' equity 950 942 1,003 1,116 1,370 1,708 1,951 2,232

Net debt -135 -102 -320 -382 -113 -203 -270 -352

Sales growth (%) 18.4 5.6 27.6 55.5 67.3 25.2 22.5 6.1

DB EPS growth (%) 4.5 -9.9 23.6 24.0 94.6 50.8 32.0 16.2

EBITDA Margin (%) 12.7 10.6 9.1 7.7 8.4 9.4 10.5 11.1

EBIT Margin (%) 8.9 7.0 6.8 5.9 6.4 8.1 9.4 9.9

Payout ratio (%) 140.7 127.4 216.5 199.9 136.9 50.0 50.0 50.0

ROE (%) 9.9 8.4 9.8 11.9 19.8 23.7 26.3 26.8

Capex/sales (%) 1.4 3.1 6.5 6.6 3.6 2.2 1.8 1.7

Capex/depreciation (x) 0.4 0.8 2.9 3.7 1.8 1.7 1.7 1.5

Net debt/equity (%) -14.2 -10.8 -31.9 -34.2 -8.2 -11.9 -13.9 -15.8

Net interest cover (x) NM NM 101.8 26.0 21.6 26.1 39.5 51.1





Valuation

Our DDM base-case valuation for Sembcorp Marine yields a TP of S$3.80. This suggests

potential downside of 16% from current levels.

Our assumptions are a growth rate of 25% over the next three years followed by a 5% dip in

earnings for a year, and a long-term growth rate of 3%. ROE assumptions for the next three

years are based on our explicit forecasts. We assume a stable ROE of ~18%. Our LT ROE

forecast is based on the historical average between 2002 and 2010E.

The cost of equity we use

The basic inputs for the cost of equity are a Singapore risk-free rate of 3.2%, a Singapore risk

premium of 3.6%, and a beta of 1.2.

This assigns a cost of equity of 7.5% for Sembcorp Marine. However, we note that the

company operates in a very cyclical industry, in which competition over the next few yearswill get tougher as new yards start to build offshore facilities. The industry is also driven by

fluctuating oil prices. We use a cost of equity of 9.5% for Korean shipbuilders. For SMM we

have used a cost of equity of 8.5%.

Sensitivity analysis

In Figures 67-72 we have carried out a sensitivity analysis for various assumptions of growth

for SMM beyond 2010. We have assumed a brief spell of negative growth rates for short

periods of one, two and three years as well as positive growth rates.

Figure 67: Negative growth scenario for one year beyond 2010, followed by stable growth rate assumption

Growth rate -3% -5% -10%

Stable growth rate 2% 3% 4% 5% 2% 3% 4% 5% 2% 3% 4% 5%

Cost of equity

7.0% 3.64 3.97 4.43 5.11 3.51 3.83 4.27 4.92 3.20 3.48 3.88 4.47

7.5% 3.63 3.96 4.41 5.09 3.50 3.81 4.25 4.90 3.18 3.47 3.86 4.45

8.0% 3.61 3.94 4.39 5.07 3.48 3.80 4.23 4.88 3.17 3.45 3.85 4.43

8.5% 3.60 3.92 4.38 5.05 3.47 3.78 4.22 4.86 3.16 3.44 3.83 4.41

9.0% 3.58 3.91 4.36 5.03 3.45 3.77 4.20 4.84 3.14 3.43 3.82 4.39

9.5% 3.57 3.89 4.34 5.00 3.44 3.75 4.18 4.82 3.13 3.41 3.80 4.38

10.0% 3.55 3.87 4.32 4.98 3.42 3.73 4.16 4.80 3.12 3.40 3.78 4.36

10.5% 3.54 3.86 4.30 4.96 3.41 3.72 4.14 4.78 3.10 3.38 3.77 4.34

11.0% 3.52 3.84 4.28 4.94 3.40 3.70 4.13 4.76 3.09 3.37 3.75 4.32

11.5% 3.51 3.83 4.27 4.92 3.38 3.69 4.11 4.74 3.08 3.36 3.74 4.30

12.0% 3.49 3.81 4.25 4.90 3.37 3.67 4.09 4.72 3.07 3.34 3.72 4.28


There are numerous possible scenarios but a check on the various valuations indicates that

the stock does not factor in a possibility of a dip in earnings after 2010, even for a single year.

This suggests that downside risk to a change in the market’s perception of the marine sector

far outweighs any upside that the stock could deliver on continued growth in the sector

beyond 2010.





Figure 68: Positive growth scenario for one year beyond 2010, followed by stable growth rate assumption

Growth rate 5% 7% 10%


Cost of equity

7.0% 4.19 4.58 5.12 5.91 4.34 4.74 5.30 6.13 4.56 4.99 5.58 6.45

7.5%4.17 4.56 5.09 5.89 4.32 4.72 5.27 6.10 4.54 4.97 5.55 6.43

8.0% 4.15 4.54 5.07 5.86 4.30 4.70 5.25 6.07 4.53 4.95 5.53 6.40

8.5% 4.14 4.52 5.05 5.84 4.28 4.68 5.23 6.05 4.51 4.93 5.51 6.37

9.0% 4.12 4.50 5.03 5.81 4.26 4.66 5.21 6.02 4.49 4.90 5.48 6.34

9.5% 4.10 4.48 5.01 5.79 4.25 4.64 5.18 5.99 4.47 4.88 5.46 6.31

10.0% 4.08 4.46 4.98 5.76 4.23 4.62 5.16 5.97 4.45 4.86 5.44 6.29

10.5% 4.07 4.44 4.96 5 .74 4.21 4.60 5.14 5 .94 4.43 4.84 5.41 6.26

11.0% 4.05 4.42 4.94 5.71 4.19 4.58 5.12 5.92 4.41 4.82 5.39 6.23

11.5% 4.03 4.41 4.92 5.69 4.17 4.56 5.10 5.89 4.39 4.80 5.37 6.21

12.0% 4.02 4.36 4.90 5.66 4.16 4.54 5.07 5.87 4.37 4.78 5.34 6.18


Figure 69: Negative growth scenario for two years beyond 2010, followed by stable growth rate assumptionGrowth rate -3% -5% -10%


Cost of equity

7.0% 3.45 3.75 4.16 4.78 3.27 3.55 3.94 4.52 2.84 3.09 3.42 3.92

7.5% 3.42 3.72 4.13 4.74 3.24 3.52 3.91 4.48 2.82 3.06 3.39 3.88

8.0% 3.39 3.69 4.09 4.70 3.21 3.49 3.87 4.44 2.80 3.04 3.36 3.85

8.5% 3.36 3.65 4.06 4.66 3.19 3.46 3.84 4.41 2.78 3.01 3.34 3.82

9.0% 3.34 3.62 4.03 4.62 3.16 3.43 3.81 4.37 2.75 2.99 3.31 3.79

9.5% 3.31 3.59 3.99 4.58 3.13 3.40 3.78 4.33 2.73 2.96 3.28 3.76

10.0% 3.28 3.57 3.96 4.54 3.11 3.38 3.75 4.30 2.71 2.94 3.26 3.72

10.5% 3.25 3.54 3.93 4.51 3.08 3.35 3.72 4.26 2.69 2.92 3.23 3.69

11.0% 3.23 3.51 3.89 4.47 3.06 3.32 3.69 4.23 2.67 2.89 3.20 3.66

11.5% 3.20 3.48 3.86 4.43 3.04 3.30 3.66 4.19 2.65 2.87 3.18 3.63

12.0% 3.18 3.45 3.83 4.39 3.01 3.27 3.63 4.16 2.63 2.85 3.15 3.61


Figure 70: Positive growth scenario for two years beyond 2010, followed by stable growth rate assumption

Growth rate 5% 7% 10%


Cost of equity

7.0% 4.24 4.62 5.15 5.93 4.47 4.87 5.43 6.25 4.82 5.25 5.86 6.76

7.5% 4.21 4.58 5.11 5.88 4.43 4.83 5.38 6.20 4.77 5.21 5.81 6.70

8.0% 4.17 4.55 5.06 5.83 4.39 4.79 5.33 6.15 4.73 5.16 5.76 6.64

8.5% 4.14 4.51 5.02 5.78 4.35 4.74 5.29 6.09 4.69 5.12 5.71 6.58

9.0% 4.10 4.47 4.98 5.73 4.32 4.70 5.24 6.04 4.65 5.08 5.66 6.53

9.5% 4.07 4.43 4.94 5.68 4.28 4.67 5.20 5.99 4.61 5.03 5.61 6.47

10.0% 4.03 4.40 4.89 5.63 4.25 4.63 5.15 5.94 4.58 4.99 5.56 6.41

10.5% 4.00 4.36 4.85 5.59 4.21 4.59 5.11 5.89 4.54 4.95 5.52 6.36

11.0% 3.97 4.32 4.81 5.54 4.18 4.55 5.07 5.84 4.50 4.91 5.47 6.31

11.5% 3.94 4.29 4.77 5.49 4.14 4.51 5.03 5.79 4.46 4.87 5.42 6.25

12.0% 3.90 4.25 4.73 5.45 4.11 4.48 4.98 5.74 4.43 4.83 5.38 6.20






Figure 71: Negative growth scenario for three years beyond 2010, followed by stable growth rate assumption

Growth rate -3% -5% -10%


Cost of equity

7.0% 3.27 3.54 3.92 4.48 3.05 3.30 3.65 4.16 2.55 2.75 3.03 3.45

7.5%3.23 3.50 3.87 4.42 3.01 3.26 3.60 4.11 2.52 2.72 3.00 3.41

8.0% 3.19 3.46 3.82 4.37 2.97 3.22 3.56 4.06 2.49 2.69 2.96 3.37

8.5% 3.15 3.41 3.78 4.31 2.94 3.18 3.51 4.01 2.46 2.66 2.93 3.30

9.0% 3.12 3.37 3.73 4.26 2.90 3.14 3.47 3.96 2.43 2.62 2.89 3.29

9.5% 3.08 3.33 3.68 4.21 2.87 3.10 3.43 3.91 2.41 2.59 2.86 3.25

10.0% 3.04 3.29 3.64 4.16 2.84 3.07 3.39 3.86 2.38 2.56 2.82 3.21

10.5% 3.01 3.25 3.60 4.10 2.80 3.03 3.35 3.82 2.35 2.54 2.79 3.17

11.0% 2.97 3.22 3.55 4.05 2.77 3.00 3.31 3.77 2.32 2.51 2.76 3.13

11.5% 2.94 3.18 3.51 4.01 2.74 2.96 3.27 3.72 2.30 2.48 2.73 3.10

12.0% 2.90 3.14 3.47 3.96 2.71 2.93 3.23 3.68 2.27 2.45 2.70 3.06


Figure 72: Positive growth scenario for one year beyond 2010, followed by stable growth rate assumptionGrowth rate 5% 7% 10%


Cost of equity

7.0% 4.30 4.67 5.19 5.95 4.59 5.00 5.55 6.38 5.07 5.52 6.15 7.07

7.5% 4.24 4.61 5.12 5.88 4.54 4.93 5.48 6.30 5.01 5.45 6.07 6.98

8.0% 4.19 4.55 5.06 5.80 4.48 4.87 5.41 6.22 4.95 5.38 5.99 6.89

8.5% 4.14 4.50 4.99 5.73 4.42 4.81 5.34 6.14 4.88 5.32 5.91 6.80

9.0% 4.09 4.44 4.93 5.66 4.37 4.75 5.28 6.06 4.82 5.25 5.84 6.71

9.5% 4.04 4.39 4.87 5.58 4.32 4.69 5.21 5.98 4.76 5.18 5.76 6.63

10.0% 3.99 4.33 4.81 5.51 4.26 4.63 5.15 5.91 4.70 5.12 5.69 6.54

10.5% 3.94 4.28 4.75 5.45 4.21 4.58 5.08 5.83 4.65 5.06 5.62 6.46

11.0% 3.89 4.23 4.69 5.38 4.16 4.52 5.02 5.76 4.59 4.99 5.50 6.38

11.5% 3.85 4.18 4.63 5.31 4.11 4.47 4.96 5.69 4.53 4.93 5.48 6.30

12.0% 3.80 4.13 4.58 5.25 4.06 4.41 4.90 5.62 4.48 4.87 5.41 6.22


The shaded region we believe reflects realistic growth scenarios for Sembcorp. The only

scenario where we see significant upside to the stock is if the growth beyond 2010 could

continue to hit double digits.

Our explicit forecast growth rate over the next three years (2007-2010) is about 25%. We

note that this is after solid growth rates of 96% and 50% in FY06 and FY07E. In our view, the

most realistic scenario is that earnings will dip after 2010 before picking up on a long-term

growth rate of about 3%. We have assumed only a 5% dip and on these assumptions havefixed our TP at S$3.80.

We note that for continued growth beyond 2010, SMM would need to have industry

conditions that support not just high offshore build but also a tight ship build and ship repair

market. Additionally, competition should continue to be benign.





Relative valuations

Sembcorp trades at higher multiples than the industry average. Compared to the companies

we cover in this space like Hyundai Heavy, Samsung Heavy, and Daewoo, the stock trades at

a premium on most multiples. Even after adjusting for the return profile, SMM trades at a

slight premium to its peers. Its heavy focus on the O&M segment versus its Korean peers’

more diversified revenue base might explain the higher multiples.

Figure 73: Relative valuations

PE PB EV/Sal

es EV/EBI

TDAROE

Name Ticker 2006 2007F 2008F 2006 2007F 2008F 2006 2007F 2008F 2006 2007F 2008F 2006 2007F 2008F

Hyundai Heavy 009540 KS

W439,000, Buy 10 23 16 2.1 6.3 4.8 0.4 1.7 1.5 3.6 11.3 8.4 17% 30% 33%

Keppel corp KEP SP, S$14.0,

Hold 16 22 19 3.3 4.4 3.7 0.9 1.5 1.4 7.0 10.8 8.8 19% 22% 21%

Daewoo Shipbldg 042660 KS,

W57,900, Buy 92 26 11 3.5 5.7 3.9 0.8 1.3 1.0 NM 17.8 7.4 4% 24% 41%

Samsung Heavy 010140 KS,

W47,000, Buy 34 23 15 2.3 4.4 3.5 0.3 0.9 0.7 5.5 9.8 5.8 7% 20% 27%

Namura Shipbldg 7014 JP, JPY1,670,

NR 25 24 15 7.6 2.6 2.6 0.3 0.4 0.3 8.9 4.4 NA 35% 38% 41%

Labroy Marine LBRY SP, S$2.47,

NR 21 17 14 0.4 5.2 4.1 2.5 1.8 1.4 14.8 10.8 9.0 26% 34% 33%

COSCO COS SP, S$5.55, NR 25 40 27 7.6 12.8 9.5 4.5 5.9 3.5 15.4 22.7 14.5 35% 38% 41%

LAMPRELL PLC LAM LN, GBP380,

Buy 22 24 17 10.5 10.9 7.8 2.2 3.5 2.9 11.9 17.4 14.3 41% 57% 53%

EZRA EZRA SP, S$6.3, NR 12 25 15 4.1 5.5 4.2 8.1 10.4 6.3 34.3 23.9 11.8 38% 27% 39%

JAYA JAYA SP, S$1.95,

NR 9 11 11 3.2 3.6 3.4 3.4 4.4 3.8 8.6 11.9 7.8 37% 35% 33%

Bharthi Shipyard BHSL IN, Rs588, NR 17 11 16 4.8 3.2 3.0 3.6 2.6 2.2 16.5 7.2 7.2 32% 34% 29%

Sembcorp SMM SP, S$4.60,

Sell 21 26 20 3.6 5.5 4.8 1.4 2.0 1.7 16.5 21.7 15.8 20% 23% 26%

Average 25.8 22.4 16.6 4.4 5.4 4.3 2.4 3.0 2.2 14.0 15.0 10.8 25% 30% 33%

Source: Deutsche Bank, Bloomberg; forecasts for non-rated companies from I/B/E/S

Historical valuation multiples

Sembcorp is trading at peak P/B multiples and peak P/E multiples of the current cycle.

Figure 74: SMM Rolling P/B Figure 75: SMM Rolling P/E

0.0

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25

30

35

40

45

J a n - 9 1

J u l - 9 1

J a n - 9 2

J u l - 9 2

J a n - 9 3

J u l - 9 3

J a n - 9 4

J u l - 9 4

J a n - 9 5

J u l - 9 5

J a n - 9 6

J u l - 9 6

J a n - 9 7

J u l - 9 7

J a n - 9 8

J u l - 9 8

J a n - 9 9

J u l - 9 9

J a n - 0 0

J u l - 0 0

J a n - 0 1

J u l - 0 1

J a n - 0 2

J u l - 0 2

J a n - 0 3

J u l - 0 3

J a n - 0 4

J u l - 0 4

J a n - 0 5

J u l - 0 5

J a n - 0 6

J u l - 0 6

J a n - 0 7

J u l - 0 7






Risks to our Sell call on SMM

Given the strength of the cycle, SMM might seek acquisitions. These acquisitions might be

viewed positively and the stock may see further upside, particularly if the strategic import is

clear. SMM has a strong balance sheet (net cash) to fund large acquisitions.

SMM has been moving up the learning curve and has gained market share. Returns andmargins are expected to improve over the next 2-3 years.

We believe SMM may be in discussions with Petrobras to build the P55 production platform.

This project could be well ahead of S$1bn and will be awarded on negotiations rather than

through tenders. So far production orders for some of the production platforms have seen

pushbacks in terms of timing but sudden order strength could see the stock spike.





Company background

Sembcorp Marine is a leading marine engineering company in Asia. Its activities include ship

repair, ship building, ship conversion, rig building, topsides fabrication and offshore

engineering. The company is a major player in ship repair and a niche player in the design and

building of vessels.

The company’s major share of revenue comes from designing and building offshore rigs.

These include deep drilling offshore jack-up rigs, semi-submersible rigs for the offshore oil &

gas industry and work-over rigs and offshore platforms. The company also undertakes

conversion of floating production and storage facilities for major oil and energy companies.

In addition, the company provides turnkey services to the offshore oil and gas industry. These

services include the engineering, procurement and construction of offshore production

platforms and floating production systems; fabrication, integration, pre-commissioning, as

well as offshore hook-up and commissioning of topside process modules and production

modules for fixed platforms and mega FPSOs.

The vessels built by Sembcorp Marine range from 2,600 TEU containerships, bulk carriers,

cable-laying vessels to ice-breaking tugs.

The Group operates in Singapore, China and Brazil. It has one of the largest marine

engineering facilities with a combined dock capacity of 3.2m deadweight tonnes (dwt)

located in Singapore, China, Brazil and the USA.

These shipyards work in synergy to provide a full range of integrated customised solutions

such as conceptualisation, design, engineering, procurement, construction, commissioning

and delivery.

History

The company was incorporated in 1963 as Jurong Shipyard. It was a joint venture between

the Economic Development Board of Singapore and Ishikawajima-Harima Heavy Industries

Co Ltd of Japan (IHI). Later in 1968, two more companies – Jurong Shipbuilders and

Sembawang Shipyard – were incorporated.

In 1976, Jurong Shipbuilders merged with Jurong Shipyard. The merged entity was called

Jurong Shipyard which was listed in 1987. In 2000, the name of the company was changed

from Jurong Shipyard Ltd to SembCorp Marine Ltd

Company holding structure

Figure 76 highlights the holding structure of Sembcorp Marine group.





Figure 76: SembCorp Marine Ltd and its subsidiaries

Sembcorp Marine Ltd

Jurong Shipyard

Pte Ltd

Maua Jurong SA

Jurong Marine

Constructions

Pte Ltd

Cosco Shipyard

Group Co. Ltd

Jurong Integrated

Services Pte. Ltd

Jurong Machinery &

Automation Pte Ltd

Dolphin Shipping

JPL Services

Jurong Marine

Services Pte Ltd

Sembawang

Shipyard

Pte Ltd

SES Marine

Services

Pte Ltd

Sembawang

Bethlehem

Pte Ltd

SOME Pte Ltd

PT SMOE

PPL Shipyard

Pte Ltd

Baker Marine

Pte Ltd

SembCorp-Sabine

Shipyard Inc

Jurong SML

Pte Ltd

PT Karimun

Sembawang

Shipyard

Jurong Autoblast

Services Pte Ltd

Bulk Trade

Pte Ltd

100%

35%

100%

30%

100%

100%

100%

70%

100%

100%

100%100%

100%

90%

85%

100%

100%

100%

100%

100%

100%

Source: Company reports, Deutsche Bank

In March 2007, the company disposed of its 55% equity stake in Jurong Clavon Pte Ltd

Group. In May 2007, the company's wholly owned subsidiary, SMOE Pte Ltd, has acquired a

35% equity stake in Shenzhen Chiwan Offshore Petroleum Equipment Repair & Manufacture

Co. Ltd.

Key management

Mr Goh Geok Ling, Chairman and Non-Independent Director

Mr Goh Geok Ling was appointed the Chairman and Director of SembCorp Marine in 2006.

Before joining Sembcorp, he was the MD of Micron Semiconductor Asia Pte Ltd. Prior to

that, he was the MD of Texas Instruments Singapore Pte Ltd for 28 years. Mr Goh has aBachelor of Engineering from Sydney University.

In addition, Mr Goh serves as a board member of DBS Bank Ltd, DBS Bank Holdings Ltd,

SembCorp Industries Ltd, Venture Corporation Ltd and 02Micro International Ltd. He is also a

Member of the Board of Trustee of Nanyang Technological University.

Mr Tan Kwi Kin, Group President and CEO

Mr Tan Kwi Kin is the Group President and CEO of SembCorp Marine. He has been a Director

of the Board since 1990.





Mr Tan has 41 years of work experience in Jurong Shipyard. He started his career with

Jurong Shipyard in 1966 as a Junior Engineer in the Design Department. He was promoted to

Manager in charge of Production Control in 1975 and General Manager in 1981. In 1990, he

was appointed MD. When Sembawang Shipyard merged with Jurong Shipyard in 1997, Mr

Tan was appointed President of the Jurong Shipyard group of companies.

Mr Tan became the President and CEO of SembCorp Marine and also the Chairman ofJurong Shipyard following the company’s name change in 1999.

In addition, he chairs the boards of Sembawang Shipyard, PPL Shipyard, JPL Corporation,

Jurong Integrated Services and Jurong Machinery and Automation.

Mr Tan has a Bachelor of Engineering (Mechanical) degree from Tokyo University, Japan.

Weng Sun Wong, Co-President, Chief Operating Officer, MD of Jurong Shipyard

Prior to this, he was Deputy President of SembCorp Marine from January 2005 to January

2006 and was the Executive Director of Jurong Shipyard from January 2002 to June 2004.

Mr Wong joined the company in 1988 as an engineer and was later appointed GeneralManager in charge of project management.

Mr Wong graduated from the University of Technology, Malaysia, with a Bachelor of

Mechanical Engineering (Marine). He also obtained a Master’s degree in Business

Administration from Oklahoma City University.

Wee Sing Guan, Director of Group Finance

Mr Wee is the Director of Group Finance. He was the Chief Financial Officer of SembCorp

Marine from February 2000 to March 2006. He joined the company as an accountant in 1974

and later held the position of Financial Controller before assuming his current appointment.

Mr Wee graduated from Nanyang University in 1972 with a Bachelor in Commerce degree.

Shareholding structure

Free float: 37.7% (Institutional Ownership – 16.3%); insider holding: 62.3%. Sembcorp

Industries is the principal share holder





Financials

Assets

The company’s stocks and work in progress form the bulk of its assets with 35% of thebalance sheet assets in FY2006. Stocks consist mainly of steel and other materials used for

ship and rig building, repair, and conversion. Fixed assets consist of 20% of total assets.

Docks, quays, launches, cranes and marine vessels form the majority of fixed assets,

supplemented by plant and machinery and short-term leasehold premises.

Figure 77: Asset breakup

0%

5%

10%

15%

20%

25%

30%

35%

40%

F i x e d a s s e t s

I n t a n g i b l e a s s e t s

I

n v e s t m e n t s i n

S u b s / a s s o c i a t e s

O t h e i n v e s t m e n t s

D e b t o r s

S t o c k s a n d w o r k -

i n - p r o g r e s s

C a s h a n d B a n k


Capex

Capital expenditure during FY 2006 was S$282.17m and almost all of it was spent on Ship

and rig repair, and building and conversion in Singapore. We expect the company to spend

about S$100m a year over the next few years.

Revenue

SembCorp’s revenue CAGR was 37%, up from $1.01bn in 2002 to $3.5bn in 2006.

The company’s businesses include 1) Rig building 2) Ship building 3) Ship conversions 4) Ship

repairs, and 5) Rig refurbishment

Rig building contributed nearly half of the total revenue in FY 2006 followed by Ship

conversion.

Figure 78 shows the breakup of SembCorp’s various revenue sources.





Figure 78: Segmental breakup

42%

32%33%

25%

17%

0% 0% 0%

9%

6%

33%

37%

45%

42%

26%

18%

23%

15%

18%

49%

7%8%

7% 6%

2%

0%

10%

20%

30%

40%

50%

60%

2002 2003 2004 2005 2006

Ship Repair Shipbuilding Ship Conversion & Offshore Rig Building Others


Given the strength in offshore segment, better margins, better leverage on limited dry dock

capacity, we expect offshore activities related to jack-ups, semi-subs and FPS to drive growth

over the next few years.

Margins

SembCorp’s margins have been falling since 2002 but showed signs of improvement in FY

2006. We expect that with benefits of scale, a slower capex profile than last year, and more

complex builds, margins will start improving over the next few years.

Figure 79: Margin trend

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2001 2002 2003 2004 2005 2006 2007 2008 2009

Gross margin EBITDA EBIT NET






Returns

With increasing asset velocity and improving margins, returns should climb over the next

three years.

Figure 80: Return trend

0%

5%

10%

15%

20%

25%

30%

2003 2004 2005 2006 2007F 2008F 2009F

ROAE ROA ROIC


Gearing

Figure 81 shows SembCorp’s gearing position. Debt increased during FY2006. The

company’s total debt at the end of FY 2006 was S$391m. The company should continue to

remain in a net cash position.

Figure 81: Net debt to equity

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

2002 2003 2004 2005 2006 2007F 2008F 2009F






Working capital days

SembCorp’s working capital days have been increasing steadily. High inventory turnover

days, though justifiable given the nature of business, are the primarily cause.

Figure 82: Working capital days

2002 2003 2004 2005 2006 2007 2008 2009

Debtors days 73 72 72 41 44 33 23 22

Creditors days 167 147 143 107 106 110 84 67

Inventory days 107 101 118 121 137 146 124 96

Working capital days 13 26 46 55 74 69 63 51


Cash flow

SembCorp had been generating positive free cash flow till FY 2005. However, FCF turned

negative in FY 2006 despite higher profits due to changes in working capital led by high

inventory.

Figure 83: Cash position and free cash flow

202.79162.44

469.48503.49

531.46

163.5

(226.8)

179.7

27.0

129.7

(300.00)

(200.00)

(100.00)

-

100.00

200.00

300.00

400.00

500.00

600.00

2002 2003 2004 2005 2006

Cash balance Free cashflow






Operations

Overall order momentum for 2007 has been very impressive with SMM securing a record

S$4.8bn of new orders so far this year. Earnings visibility stretches into 2010, and strong

offshore volumes should lead to efficiencies that drive operating margin and earnings

improvement.

The ship repair and ship conversion businesses have steadily grown over the past few years

as a result of long-term strategic alliances. Revenue contribution from ship repair increased

by 15.4% in 2006.

The total number of ships repaired in 2006 increased to 314 vessels compared to 309 in

2005. Revenue per vessel repaired increased from S$1.72m to S$1.95m.

Figure 84: Revenue per ship repaired

2005 2006

No. of ships repaired 309 314

Revenue (S$ m) 530.6 612.1

Average revenue per ship repaired (S$ m) 1.72 1.95

Source: Company reports, Company data

Increased demand for jack-up upgrading and repairs and the continued migration of LNG

restoration jobs to Singapore from Japan will drive the repair business near term. SMM has

been moving up the restoration services segment to the higher-margin LNG carriers. Under a

technical services agreement with Technigaz, SMM repair teams have been trained on the

necessary membrane repair procedures.

With a spread of 14 yards in Brazil, Indonesia, and the US, SMM has been able to win

contracts which require the use of local content and labor. The 35%-owned Maua Jurongyard in Brazil in particular will provide SMM with a competitive edge in bidding for large FPSO

jobs from Brazilian national oil company Petrobras.

According to the IMA, Petrobras is expected to spend up about US$6B on 8-9 mega FPSO

projects over the next 5 years. SMM also has a 30% stake in Cosco Shipyard Group. This

gives it an access to a lower-cost ship repair facility.

Vessel mix

Over 84% of the ship repair revenue come from high-value repairs to tankers, container

vessels and bulk carriers. Sembcorp also upgrades floating production-storage-offloading

(FPSO) vessels; and offshore jack-ups.

Figure 85: Vessel repair mix

2005 2006

Tanker 46% 37%

Container 17% 10%

Bulk Carrier 3% 11%

LPG/LNG 10% 15%

FPSO upgrading 3% 6%

Passenger 2% 0%

Offshore upgrading 3% 5%

Others 16% 16%






Shipbuilding

Though revenue from shipbuilding activities rose by 12% in 2006, the company has been

scaling down its shipbuilding activity.

Currently the outlook for the sector remains strong globally, which is backed by high charter

rates. An aging fleet worldwide continues to drive demand for new ships, but SMM will scale

down its shipbuilding activity as demand from better-margin oil offshore works continues tobe strong.

Ship conversion and offshore

This segment contributed 26% to the total revenue in 2006, growing modestly by 3.1%. The

company expects ship conversion activities to remain strong in 2007.

With the high global demand for energy, prospects for FPSO vessels, floating storage and

offloading (FSO) vessels and offshore platforms, demand is likely to remain quite strong.

SMM has a solid track record in converting FPSO systems from tankers and has an

approximately 30% market share. SMM should benefit from the growing trend towards the

use of converted hulls for FPSO projects.

Rig building

Revenue from the rig building segment had the highest growth in 2006 with a 350+%

increase due to the progressive recognition of more jack-up and semi-submersible rigs.

The company expects semi-submersible rig and jack-up rig activities to be strong in 2007

with a worldwide utilisation of 89% compared to 87% a year ago.

As the global demand for energy is forecasted to grow, demand for drill rigs is likely to be

very strong since meeting the long-term high demand for oil requires new sources of oil to

be found and produced.





Appendix 1

Important Disclosures

Additional information available upon requestDisclosure checklist

Company Ticker Recent price* Disclosure

Sembcorp Marine SCMN.SI 4.60 (SGD) 26 Sep 07 6

Keppel Corp Ltd KPLM.SI 14.00 (SGD) 26 Sep 07 6,7,8,14,SD11

*Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See

“Important Disclosures Required by Non-US Regulators” and Explanatory Notes.

6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company

calculated under computational methods required by US law.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment

banking or financial advisory services within the past year.

8. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking services

from this company in the next three months.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within

the past year.

Important Disclosures Required by Non-U.S. Regulators

Please also refer to disclosures in the “Important Disclosures Required by US Regulators” and the Explanatory Notes.

6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this companycalculated under computational methods required by US law.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment

banking or financial advisory services within the past year.

Special Disclosures

11. Deutsche Bank has been retained to provide a valuation report in connection with the pending acquisition of Grupo

Ipiranga by Petrobras, Ultrapar Participacoes and Braskem SA.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this

research, please see the most recently published company report or visit our global disclosure look-up page on ourwebsite at http://gm.db.com.

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject

issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any

compensation for providing a specific recommendation or view in this report. Pyari Madhava Menon





Historical recommendations and target price: Sembcorp Marine (SCMN.SI)

(as of 9/26/2007)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07

Date

Securty Prce

Previous Recommendations

Strong Buy

Buy

Market Perform

UnderperformNot Rated

Suspended Rating

Current Recommendations

Buy

Hold

Sell

Not Rated

Suspended Rating

*New Recommendation Structure

as of September 9, 2002

Historical recommendations and target price: Keppel Corp Ltd (KPLM.SI)

(as of 9/26/2007)

13

121110

9

8

7

654

3

2

1

0.00

5.00

10.00

15.00

20.00

25.00

Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07

Date

Securty Prce

Previous Recommendations

Strong Buy

Buy

Market Perform

Underperform

Not Rated

Suspended Rating

Current Recommendations

Buy

Hold

Sell

Not Rated

Suspended Rating

*New Recommendation Structure

as of September 9, 2002

1. 26/1/2006: Buy, Target Price Change SGD15.002. 28/4/2006: Buy, Target Price Change SGD16.30

3. 21/6/2006: Buy, Target Price Change SGD16.07





8. 4/4/2007: Buy, Target Price Change SGD22.209. 27/4/2007: Buy, Target Price Change SGD25.10









Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-

holder return (TSR = percentage change in share price from

current price to projected target price plus pro-jected

dividend yield ) , we recommend that investors buy the

stock.Sell: Based on a current 12-month view of total share-holder

return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out

and, based on this time horizon, do not recommend either a

Buy or Sell.

Notes:

1. Newly issued research recommendations and target

prices always supersede previously published research.

2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10%

or more over a 12-month period

Hold: Expected total return (including dividends) between-10% and 10% over a 12-month period

Sell: Expected total return (including dividends) of -10%

or worse over a 12-month period

12%27%

61%

4%10%11%

0

100

200

300

400

500

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship





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own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities and as such investors should take expert legal and financial advice before entering into any

transaction similar to or inspired by the contents of this publication. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of

Standardized Options," at http://www.optionsclearing.com/publications/risks/riskchap1.jsp. If you are unable to access the website please contact Deutsche Bank A G at +1 (212) 250-7994, for a copy of this important document.

Furthermore, past performance is not necessarily indicative of future results. Please note that multi-leg options strategies will incur multiple commissions.

The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon

their specific financial situations and investment objectives. If a financial instrument is denominated in a currency other than an investor’s currency, a change in exchange rates may adversely affect the price or value of, or the

income derived from, the financial instrument, and such investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price or value of financial instruments described in this report,

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