DBS Vickers on SembMarine

SembCorp Marine’s client, Petromena has won approval from its bondholders for higher debt facilities of US$300m for the first semi-submersible rig scheduled for delivery by SembCorp Marine in April 2009, and thereby avoiding a default on payments to SMM. Petromena has another two semi-submersible rigs under construction by SMM. We estimate the remaining and maximum exposure to the 3 Petromena's rig construction projects to be about S$1.1b. This represents about 10.9% of its net order book of S$10.1b. We have already assumed order delay/cancellation of 15% of orderbook for the group. Going forward, we believe that SMM may try to conserve its available cash hoard so as to maintain its future contract renegotiation flexibility. This may result in a reduction in future dividend payout ratio. We now assume SMM to maintain its absolute dividend payment in our FY08-10 forecast periods, which implies around 40% dividend payout ratio. Maintain HOLD.