Stock Buy Call: SMM with fair price of $3.5 by UOB Kay Hian!

SembCorp Marine's (SMM) revenue rose 11.5% YoY to S$499.1m in 1Q06. Thiswas mainly attributed to the 4-fold jump in rig building's contribution toS$194.5m and ship repair's 35.5% YoY gain to S$130.2m in 1Q06. SMM's netprofit shot 71.5% YoY higher to S$40.8m in 1Q06, despite an unexpectedS$6.1m impairment loss due to the decline in market value for a vesselavailable for sale. On account of the strong net order book gainsyear-to-date in 2006, and better profit margins in 1Q06, we have nudged ournet profit estimate slightly upwards by 1% to S$225.3m in FY06 and 10% toS$319.0m in FY07. Using 0.5x PEG and 22.5x FY06 PER, we have raised ourfair value estimate to S$3.50 for SMM (vs. S$3.42 previously). We believethat our valuation metric is not excessive, in view of SMM's strong pricingpower and high earnings visibility, and is consistency with SMM's 22.3xaverage historical PER. In our opinion, SMM allows investors to reap thefull valuation premium attached to its direct and strong exposure to thederived demand for rig newbuilds; attributable to high oil prices and themulti-year rig replacement cycle. Maintain BUY.