Maybank Kim Eng 2015-08-21: Offshore & Marine Sector - Opportunity in a crisis.


Opportunity in a crisis 

  • We remain negative on sector fundamentally. But our measure of oil contango1 is at such extreme levels that typically, near term oil prices bounce. 
  • If this happens, the sector could rally. Low quality names could perform short term. 
  • We still like Ezion, which we estimate trades at replacement cost. Rallies in Sembcorp Marine, Nam Cheong and Vard should be seen as opportunities to cut positions. 

What’s New 

  • Our cover chart shows the spread between the 5-year WTI crude price and 1-year price together with the near month oil contract. At such extreme spreads, near term oil usually rallies. Earlier this year, the oil price rally was 45%. 

What’s Our View 

  • Our recommended strategy entails: 
    1. building positions in oversold, but high quality names at current depressed levels and 
    2. cutting exposure to those with uncertain outlook during our expected short-term bounce. 
  • We prefer asset-owners like Ezion with exposure to production and maintenance operations and remain negative on asset-builders such as Sembcorp Marine, Nam Cheong and Vard. 

Back to fundamentals: Reiterating BUY on Ezion; SGD1.35 TP 

  • The oil industry is acutely aware that sustained delays or neglect in maintenance work would impact future production. This underlies our confidence that Ezion is unlikely to face with the severe rate and utilisation pressures that offshore drillers and OSV owner are experiencing. Ezion and liftboat peer, Gulf Marine Services’ (GMS LN, Unrated) ability to keep operational vessels fully utilised supports this thesis. While there were still some rate and operational pressures, we take comfort that management has taken proactive actions such as vessel switching to manage these issues. 
  • Ezion’s 26% share price dip post 2Q15 result is unwarranted. Quek Leng Chan of the Hong Leong Group has notably increase his stake in Ezion from 7.99% to 8.22% at cost of SGD0.66. 
  • We reiterate BUY on Ezion with unchanged TP of SGD1.35, pegged to 1.0x FY16E P/BV, which remains our key pick for sector exposure. If oil price stages a technical rebound, it could serve as a short-term catalyst while a more sustainable re-rating trigger will need to come from 4Q15/1Q16 EPS jump as more assets contribute. 
  • Maintain SELL on SMM (TP SGD2.00), Nam Cheong (TP SGD0.17) and Vard (TP SGD0.35) as we believe that shipyards will face increasing pressure to replenish depleting orders. 

Ezion now trading at replacement cost 

  • With the 26% dip in share price post its 2Q15 result, we revisited our replacement cost analysis. Our latest calculations show that Ezion is now trading at replacement value, which we believe provides a floor for the stock. On both P/E and P/B basis, Ezion is trading below its trough valuation during the GFC. However, it has a more sustainable business than in 2008 where it had not even started its liftboat business. 

Ezion’s stock performance trails peer GMS 

  • Ezion’s stock price performance has shown further divergence from closest peer, GMS. GMS operates liftboats mainly in the Middle East and European region. Its exposure to the Middle East region may explain its relative stability. 
  • However, looking at fundament data, Ezion is trading at a discount to GMS based on P/BV and P/E. While Ezion has a higher gearing, it has demonstrated its ability to access funding with recent bond issue of SGD120m at 3.65%. Strong positive FCF generation in FY16E should also bring gearing down further. 

Substantial shareholders increase stakes in Ezion 

  • While substantial shareholder, Franklin Resources has cut its stake to below 5%, we see Ezion and CEO Chew Thiam Keng buying back shares. Notably, one of Ezion’s strategic shareholders, Quek Leng Chan has increased his stake from 7.99% to 8.22%.

Yeak Chee Keong CFA | http://www.maybank-ke.com.sg/ Maybank KE 2015-08-21
BUY Maintain BUY 1.35 Same 1.35
SELL Maintain SELL 2.00 Same 2.00
SELL Maintain SELL 0.17 Same 0.17
SELL Maintain SELL 0.35 Same 0.35